'We are traditional and are doing well'

Q&A/ Aditya Puri

HDFC Bank, the second largest private sector bank in the country, has reported a 30 per cent rise in its net profit in 2006-07. Though it has reported a steady growth in profit over the last five-six years, it has never been seen as an aggressive bank.

Its Managing Director and CEO Aditya Puri tells Rajendra Palande and Anita Bhoir that while it is not seen as aggressive, it is in the top three in the business segments it operates in. Excerpts:

How will Basel II affect you?

We are happy with it. It recognises that if you have a good portfolio, your risk weight is lower. You have to, however, make a higher provision for operational risk. We have done our calculations and as of now, we come out marginally positive under Basel II. We will have a capital release which will help us in pricing and return on equity. We may not have to raise that much funding.

Are the risk weights set by the RBI justified?

Any regulator in an environment where there is overheating in a particular asset class is entitled to use multiple areas to cool it down. So based on that, the RBI is saying it thinks there is overheating and the prices are high and it wants to encourage banks to have a safer lending policy. This has nothing to do with international norms and the system not adopting international norms.

The market perceives HDFC Bank as laidback and traditional.

If you define traditional banking as balancing risk and reward to get an appropriate net margin, we're traditional. If you define it as understanding that there will be business cycles which will result in a deterioration of portfolio either in a downward market trend or in a rising interest rate scenario, we're traditional. In the past five years we have grown at 30 per cent compounded and we have no strain in our portfolio.

Is acquiring scale critical?

Scale is necessary but it cannot be an end in itself. If the bank has to reduce the interest rate and take higher risk to get the extra volume, I don't want it for HDFC Bank. In the business we participate, we are always among the top three.

Which are the sectors that will contribute to the bank's growth?

The retail and corporate portfolio of HDFC Bank will continue to grow robustly. The profile of customers we are dealing with, the credit and margin we are operating in "" we do not see a slowdown in any business, in particular the retail business. Business banking is growing well largely because of the spread of prosperity and we are growing between 30 and 50 per cent in small businesses.

Is agriculture lending profitable?

We have tested a pilot and do not see any major losses or any huge investment that is required. It's just extending the existing products and businesses to a wider geography. As far as the agriculture business is concerned, our strategy is very simple: two-thirds of this country resides in rural areas and they account for only a fifth of the GDP. These areas are under-banked as a lot of their money is tied up in non-monetary assets. The ratio of fixed deposits to GDP in our country its 60 per cent while it is 110 per cent in China. The stock of personal gold in this country is 50 per cent of fixed deposits.

The farmer requires loan for crops and for personal needs and we've launched an international kisan gold card for this. In order to inculcate the money habit, he can open the zero balance no-frills account. We also provide loans against warehouse receipts.

Farmers also work with corporates, hence we are also present in the contract farming finance business. We are also major financers to the milk business along with NDDB to the dairy co-operatives. The micro-finance business is growing very fast. Around 40 per cent of the rural economy is non-agriculture, so we have launched business banking for small traders, shopkeepers and mechanics. We have launched jewellery loan products here to substitute the money lender.

The 100 new branches we have opened are in under-banked areas. More than a fourth of the existing 684 branches are in under-banked areas. Currently, 50 to 55 per cent of the business comes from the top nine cities, but this is changing as our branches move to under-banked and rural centres. Ultimately, more than 60 per cent of the business will come from outside the top 10 cities.

What are your overseas expansion plans?

We have applied for a branch in Hong Kong. We are also looking at setting up representative offices. We will expand our presence but at this point of time, there are not too many Indian companies that are overseas. As usual the media has created a hype about just 12 Indian companies going global. You need a branch if you are planning to offer sophisticated derivative products. We will offer it out of Hong Kong.

Have you received approval from the RBI on higher exposure to capital markets?

The RBI has said banks with better risk management systems will be given higher exposure limits. We already had a higher limit of 8 per cent. We are in dialogue with RBI on the appropriate limit for us.

Any learnings from the IPO scam?

The IPO scam had nothing to do with the risk management system. We were a victim of the IPO scam; we followed all regulations. Until you have a social security number you cannot have a foolproof system in place.

Are you open to inorganic growth opportunities?

We are always open to any acquisition that will benefit our shareholders or will add to the marketshare in the business we participate. At the moment there is no such acquistion that is being discussed or identified by us that is available for sale.

Has Citibank picking a stake in HDFC given them any rights in HDFC Bank?

Citibank's investment in HDFC has nothing to do with HDFC Bank. I have no partnership with Citibank.

Is the bank planning to raise any fresh capital?

We are examining the need to raise capital. Our last equity issue was around three years ago. The bank has headroom to raise funds through the tier II route.

Where do you see HDFC Bank in the next three to five years?

As we stand, HDFC Bank has a good brand name. We have all the products. We are market leaders in almost all segments. We are not market leaders based on stock, we are market leaders on flow. We intend to consolidate our position and plan to be in the top five banks.