In an interview with Moneycontrol, Rajat Verma, MD and Head of commercial banking India, HSBC, said the share of PSBs in large corporate lending will reduce over next 5 years.
Public sector banking must see material reforms at an institutional level with quick resolution for large stressed accounts, to preserve the daily erosion of value of assets under insolvency and bankruptcy code (IBC), according to a senior executive at HSBC.
In an interview with Moneycontrol, Rajat Verma, Managing Director and Head, commercial banking India, HSBC, said the share of PSBs in large corporate lending will come down over next 5 years and HSBC will enhance its focus on growing the small and medium enterprise (SME) portfolio, which is currently about 20 percent of the commercial lending book.
Verma spoke about how the Rs 12,700 crore fraud at Punjab National Bank is an issue of not having the fundamental control systems in place, and how the Reserve Bank of India’s new resolution framework is simpler with one of the highest levels of diligence on a global scale.
HSBC, a global leading bank, had reported a 23 percent rise in profit before tax from India in the year ending December 2017 led by higher lending income. Profits from its commercial banking division, which lends to large and small and medium enterprises (SMEs), rose 29 percent to USD 159 million in 2017 from USD 123 million in 2016.
India figures among the top Asian markets for HSBC after Hong Kong and China with employee base of nearly 35,000 people.
Excerpts from the interview:
Q. How is the credit business for HSBC and at an industry level?
A. Credit growth has been slow for the past 4-5 years now. Last two quarters seem to suggest there is some pick up, yes could be base effect. But there are some green-shoots, a little bit but not dramatic and we would like it that way.
It is very sectoral. There is momentum in the metros, roads, infrastructure, airline industry and capacities are building up. So there is a clear case of more government spending.
At HSBC, we cater to local corporates – traditional mid-to-large corporates, above USD 3 million turnover up to large conglomerates but not the very big ones. I think there is some risk aversion still in Indian companies and not a lot of overseas acquisitions.
Q. Are bankers cautious on further lending because they are more empowered to refuse the big borrowers with the IBC?
A. If credit is very easily available and with a very low benchmark of credit standards then you will find another cycle of more NPAs (non performing assets). The bars were very low for project finance, etc. So I would be surprised if the new lending happens that way. Typically, more credit will not go to the same borrowers which are under more stress, plus, there is reporting of SMAs (special mentioned accounts) and banks with large NPAs could be distracted, so they kind of freeze and there will be some more time before that readjustment happens. I don’t think credit will stop as other players will step in but yes the share of PSBs will come down, all this over next 5 years.
Q. How do you see the move of IBC and the way it is shaping right now as resolution deadlines draw closer?
A. It has not happened yet. See, as the time goes by most of the assets will lose value and the amount of debt keeps mounting. When in IBC, in a factory the orders dry up, there is less maintenance, it stops functioning or slows down and so the value of the assets drops quickly. So, I hope the assets get resolved quickly because they are losing value every day. Code is very good but we would like to see results soon.
Q. How do you see RBI’s new resolution mechanism framework?
A. It is a simpler mechanism which will cut out the debate on which way to progress, there is just one way. Also, the fact that they are tightening with the SMA reporting, etc…it is very good. I have not seen this level of diligence in other parts globally.
Q. What do you make of the PNB fraud?
A. From whatever I have seen and read, it looks like a failure of controls and a pretty clear failures of what should have been addressed. The systems not talking to each other, the dual checking, the system has to take control and not people, I would say it is NOT OKAY.
Looks like two issues here. -- First is on the controls on when you release these documents ---the SWIFT systems. That has to be looked at first. Then comes the audit and checks...It is a more fundamental systems issue compounded by the failure of checks. In today’s age, you have to have an IT system that passes basic controls. These are basic and not high-ended controls.
Q. Do you think there needs to be a relook at the governance of public sector banks?
A. I think there has to be some reform definitely that needs to be looked at. My suggestion would be on the lines with what the previous governor (Raghuram Rajan) said that we need to professionalise the banks quite materially and probably this just doesn’t mean the MDs because these are large banks and lot of complicated issues arise. This has to be more into the institution than what it is today.
Q. Coming to HSBC, where has the 29 percent growth in commercial banking come from?
A. In our case, we usually tend to deal with the owners of the company and not rely on their professionals alone. We have a good focus on SME and corporate sector and have limited the scale to 12 cities. We believe in being close to the customers, one cannot do or know the business by staying away from the borrower after lending. That’s the underlying old fashioned philosophy. Banking is not that complicated, you need to know your customer (KYC). We are growing our balance sheet and managed the risks well so our NPA levels are negligible, part of the reason is because we are careful in client selection and we do business in what we know and understand. If we don’t understand gems and jewellery, we do not enter, not saying it is bad.
Q. Why SMEs? What about growth outlook?
A. It is a growth business – wholesale, SME and cross border remittances, so as a corporate bank we want to be the leading provider for our clients. Want to facilitate all services ECM, DCM, etc… and not just lending. So we will continue to be healthy from the credit and risk perspective and focus on our principles. We want to focus more on SMEs as we have not done enough and it feeds into our regulatory obligations. We want to be more meaningful to the SMEs as they are set to grow bigger and we want to be a part of the life cycle of the SME which can grow into a big company going forward. So it will be a long term partnership.Right now SME is about 20 percent of our commercial banking and will continue to grow that. SME is a very balanced business, gives us assets, liabilities, has diversified risks, gives them more value in terms of reach and strength and it is a business where we can build our platform.