HDFC Bk Chief on Lehman impact, interest rates, M&A

On the possibility of rate cuts, the Managing Director and Chief Executive Officer of HDFC Bank, Puri says, "The rates will not go down further as they have already dipped substantially such that top rates corporates are getting unrealistic rates." However, he doesn't see the rates going up either.

On the Bank's growth plans, Puri says they will look at acquisitions if they are available at a reasonable price. He further adds that HDFC does not need to raise capital for the next three years. "We have at a CAR of 15.6%. Also it is likely that HDFC will convert their warrants which will take us through 17% with a tier-I of 12.6%."

Here is a verbatim transcript of the exclusive interview with Aditya Puri on CNBC-TV18. Also watch the accompanying video.

Q: What would your comment be on the period pre Lehman-do you think the Indian banking system was appropriately regulated, over-regulated or under-regulated?

A: I do believe that we were exceedingly well regulated and not enough credit has been given to proactive actions that were taken by the regulator.

Let me give you a few illustrations-when you have excess which lead to financial crisis these are based on over lending, over borrowing and imbalances that are created in the economy. I think Dr Reddy recognised that so he focused on real estate, increased the risk rate, increased the provision norms, stops banks from lending on land. So the entire real estate bubble if any would bypass the banks and bypass though whole system. He did the same for the stock market-he put capital exposure norms, he limited the total exposure and so you had no bubble in the stock market. Retail lending was going too high and was also aiding in inflation, he increased the risk rate and increased the provisioning norms.

When people were not pricing assets rightly he tightened money and this coupled with all norms forced the participants in the market who were not pricing it right and would have run into a problem to revise their pricing. So in terms of a regulator acting proactively to look at systematic risk I think we did a good job.

Q: Considering that we had escaped the turmoil itself, would you say therefore we continue in this regiment. You seem to be saying that no, now is the time to take the fist step towards getting more marketised?

A: Absolutely. Let me put it differently. I think what has happened is that we have got a chance to leap frog and come out with a right system without going through the miseries of our western brother.

So our banking system is fine-alive and kicking and doing a reasonably well. We do not have a corporate debt market. We definitely need a corporate debt market. We have been talking for a long time about it.

The issue in my mind is if you need a corporate debt market you first need a highly efficient and liquid sovereign bond market. We have a sovereign bond market but the liquidity is only in ten years. Because of that you can not have an arbitrage-free Indian rupee yield curve. So we probably need to issue a lot more securities across multiple tenures to have the yield curve. Once we have the yield curve, so that we do not throw the baby with the bath water, we need basic interest rate derivatives in terms of futures and options. We are starting with 10 years that is where the liquidity is, I hope it comes down.

But most importantly we do not have a spot market, there are not enough investors. So we can keep talking and that is why probably our debt market is not developing. That unless we liberalise the insurance, provident fund, pension funds etc for large scale investors to come into the debt market which creates a spot market, the futures market will come later. There can be an intermediate step where maybe with bank guarantee corporate debt these guys are allowed to invest in the interim. In the long run they can invest directly. But the issue is the spot market and without a bond market I can tell you we can't finance infrastructure.

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