NBFCs, banks must have same norms; mfg boost critical: HDFC

A: This is our 37th year in operation. We started in 1977and that time, no one had ventured, no one had endeavoured to do retail loans. There was no long -term finance available, there were no foreclosure laws and at that stage, it was ICICI who thought that this is a good business to get into, retail.

Retail lending was unheard of in India and that's the time when I was in Chase Manhattan, I was running the Chase office here and they transferred me to Saudi Arabia which is an oil-rich country where you get two months annual leave, the attraction was 2 months annual leave because the Americans did not want to go to Saudi Arabia in those days.

I am talking of 37 years ago; the first oil boom. So, I had a choice between going to Saudi Arabia or join this new institution. So, I am glad I decided not to go to Saudi Arabia, that's when I left Chase and joined this.

There was a need for housing finance because people don't have large money to put in a house. Housing is the largest investment a family makes in their life time and you need institutional support, you need banking support for them to pay over a period of time. Why pay rent every month and not EMI and own the own house. So, this concept was there, it has worked all over the world but not in India.

Now, the main reason it did not work in India, was because it was only fixed rate lending. There was no concept in India of a variable rate loans, floating rate loans. A bank would not be able to give a 15-year fixed rate loan, so we had to borrow long term money in those days and give fixed rate loans. The floating rate came only in the end of 1990s. That's the time when the variable rate interest phenomenon and that was the time the banks got into housing finance.

So, there were reasons why banks were excluded or banks did not pursue this. Now, today they are pursuing it very actively and if you see foreign institutions, if you see US banks or European banks, mortgage finance is a very big chunk in the total lending portfolio. In fact outstanding mortgages are more than industrial lending. So, it\\'s a big part of a bank portfolio. It was not in India and now you will see in India over the years that mortgage will become a very important item in a bank\\'s balance sheet.

If you just look at housing as a percentage of Gross Domestic Product (GDP), is a good number to look at, it is 9 percent in India. It's still single digit. It is 18 percent in China, it is 25 percent in Thailand, it is 35 percent in Malaysia and 80s and 90s in US and UK and Denmark. So, we have a long way to go. From nine we can easily get to 20 in 10 years time. When we started 37 years ago, it was two percent of GDP. So, in 37 years it has moved from two to nine. So, look at the scope in this business, the scope is enormous.

Q: If you just look at as – I am moving from the history of HDFC to the history, in a way the development of India. In this period, 1977-2015 you have seen enormous change in the political and economic landscape of India and you have been a part of that journey, you have dealt with a number of governments, you have been very bold and forthright in expressing your views across governments. As you look at this evolution of Indian polity and economy, sitting where you are, how do you sort of — number one: look at history and judge it in the context of where we go from here on a political economic basis, the broad Indian story because there are many people here who’d love to get your view and relate the past into the future?

A: I’ll just say a few words on the earlier question that in any financial sector, conservatism has to be the hallmark of an organisation and you cannot be over aggressive in a financial sector and many people have burned themselves when they have been very aggressive. So, apart from having a customer-centric or ethical culture, it comes from the top. From the top one has to be aware of what is happening in the organisation and one must have a clean record otherwise you get into trouble in this business.

On your question, the best days in India are yet to come and I’m convinced. Unfortunately I may not be alive to see some of the better days that come but at least I am happy to think that they are going to come and I’m convinced they will come. We have a strong government; we have a leader who leads from the front. They have the right intent on number of issues of ease of doing business, of setting up manufacturing, of creating jobs, single-window clearance. I can go on and on and even in our state in Maharashtra I was very enthused to read what our chief minister wants to do to the city and in the state. This city, the commercial capital is the most neglected city in the country and it gives the maximum revenue to the Centre and yet people have not invested, our government has not invested. This chief minister is a breath of fresh air. He comes with no baggage and I am sure he will do wonders in the next five years.

So, I am hopeful that India will do much better. I am not saying that we will get to 10 percent next year. It’s a slow climb, you cannot expect in a large country like ours, in a poor country like ours to seed GDP growth rates going 2 percent, 3 percent. It’s a one percent a year climb. In five years we can get to 8-9 percent. So, we cannot expect to jump but slow and steady wins the race and government means business. The Prime Minister is very keen and he is very straightforward and he is business minded and you know the number of hours he works and he’s really revolutionised the ministries, the bureaucrats. You go to Delhi; you can get appointments at 9 am, now you don’t have to wait till 11. So, to think things are different in Delhi and people are working and it’s good for India. It’s very good, that’s why I am very optimistic. In a country like ours, we may not be able to see the progress on the ground level immediately and I have heard people complaining that nothing has changed, auto sales have not increased, FMCG sales have not increased — it takes time and the finance minister keeps saying that I want to put more money in the consumers’ pockets, I want more savings.

We could not have had a better time now when all commodity prices are all time low. Oil, which is our biggest weakness, is 50 percent lower. We will save in a full year more than USD 50 billion on import of oil if it remains at today’s level. It’s a huge plus for India. Coal, we import, we have large coal reserves but we are one of the largest importers of coal. Coal prices have come down 45 percent. All this helps India and with the right policies, good governance and with international commodity pricing helping us, there is no place better than India today to invest.Q: One of the things that you alluded to is the perception that are – the new government’s vision and talk has been excellent. More needs to be seen on the walk and in that context the fact that there is vision, there is a strong project management approach, the whole strategic architectural piece. Do you think the government has enough muscle and brainpower to really get the strategic architecture piece by piece in the middle between Modi’s vision and strong project management?

A: The growth happens in the states, not at the Centre. So Centre can lay down policies, Centre can push the states to do things. The growth, the development, the progress has to happen in the states. So, you will see that states, well-run states with dynamic chief ministers will do much better than other states and there is little influence what the Centre can do to the states other than push them and keep pushing them.

So, I would say that the Bharatiya Janata Party (BJP) government has definitely a much larger clout on the BJP states and you will see that the BJP states doing well because they will been directed from the Centre if they don’t follow the policies of the government- whether it is single window or e-tendering or for all government contracts.

They are talking of e-tendering- the Maharashtra Chief Minister said anything the government orders over Rs three lakh is going to be on e-tender basis. Rs 3 lakh on e-tender; so it is totally transparent process; this is the best news I have seen, I have heard and from April 1 he says we will institute this in Maharashtra.

So, I guess the states have to implement the policy and the Prime Minister or the Centre has very little that they can do. Fine, some of the ministers in the Centre maybe first time ministers and so they will take time to come to grips. So, we have to give them time, six to seven months time in a five years time is too short a time.

I feel that we should give six more months and you will see distinct changes on the ground level and the economic policy that we will see later on here this month and the railway Budget and the finance minister’s Budget will be the key documents that will see India’s progress over the next few years.

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The direction, the emphasis on number of issues, how to have not a hostile tax department, how to have simple tax laws, how not to scare foreign companies with taxation demands, you will see a lot of things in this Budget and I am looking forward. I have never looked forward for a Budget as much as this time.

Q: If we move to the financial sector and I am looking at the broader financial sector banking and all, the overall financial sector including the state owned banks. Particularly the investors have looked at the recent results, quarterly results both from public sector banks and even some from private sector. How do you see the whole financial sector play out as we look at the next 12-18 months and then also beyond that? The long term the fact that state owned banks are 75 percent of the system how do you see the overall big picture financial sector?

A: One must take it for granted that in the financial sector the private sector is going to play a larger role that it has played in the past, whether it is in mutual funds, insurance companies or banks. If you see, life insurance companies already all private sector life insurance companies are almost doing 40-45 percent of new business and this number is going to go up. Same is the thing in non-life insurance.

Public sector banks may have 75 percent of the banking sector advances but since there are more players and more private sector players and not that many new public sector players, the share of public sector has to come down and this is a given fact.

We had at once upon a time 100 percent of the housing market share. Today we have may be 25 percent or 30 percent of the market share. This is bound to happen. So, public sector government must accept that, that public sector share is going to come down. So, if they want to use public sector banks for their own purposes of rural development or job creation or anything, they will have to think it through, how do they get private sector banks into it because we are accountable to our shareholders.

Though public sector banks are listed predominantly they are the government arms. So, you will see more competition, you will see more players, you will see by end of this year new payment banks, new small banks. Now the move of the Reserve Bank of India (RBI) according to me is they are encouraging new banks, it may not be universal banks, may not be large banks, the worry which we have is that NBFCs should not overtake the financial sector.

Informal banking that has really created problems in China, what is dreaded to be a major problem and issue in China. One third of the Chinese market is in informal finance sector. I don’t think we can afford to do that. I think the regulators and the government, finance ministry are well aware of it.

Q: The development of the public sector banks as they need more capital for growth and then the 51 percent issue, what are the options and how do you see it in the context of the politics?

A: The government has number of options. They have to bite the bullet. The first option really is every public sector bank government holding will come down to 51 percent.

Today they have many banks with 60-70 percent. So, that is step one. Once they come down to 51 percent what is the next way to raise money? They can issue non-voting shares, these are things talked about, they can issue voting and non-voting. Non-voting shares can have a discount to the price. Some companies, some individuals, some FIIs may be interested in buying non-voting shares. Today very few people vote at AGMs. You have a right to vote but no one goes and votes. So, that is another option.

Then you talked about or may be you have recommended to the government that they should have a holding company and sell those shares. All banks shares in an holding company and divest those, so the banks will get money. So, indirectly you still have over 51 percent in investment arm where all government holdings will go in and that is another option.

Preference shares is another option.

Q: What do you feel about that option?

A: I don’t think it is a good option.

Q: I agree with you on that. If somebody wants to buy State Bank of India, he will have to buy all the banks together.

A: Exactly, I don’t think it is a good option at all. I hope they don’t do that.

The best would be if they take a view that we will go down to 40 percent over 3 years. They can go down to 40 percent and yet they are the single largest shareholder. They can have the same influence.

Q: Do you think they can get it done politically?

A: Political issue is there but I think with such a large majority in the Lok Sabha after two years when the Rajya Sabha majority comes to them it will be much easier for them to do it. They can still have the same control that they have today except the slightly lower shareholding.

However, insurance and asset management are huge growth drivers. Insurance penetration in India is very low. We have miss-sold insurance in the last 10 years and so people have a bad experience of insurance. If every individual who borrows money for the home, takes an insurance policy, if anything happens to him the loan is written off. It is a no-brainer but still we are unable to convince that borrower that why don’t you take a insurance cover with it.

So, we have to do this education to our people why insurance is such a excellent product. You have tax planning, you have safety, you have a saving instrument. I am sure as we go on the penetration in insurance has to go up.

Asset management if you see in the last few months we see a large number of retail investors coming back to the mutual fund investment which is very positive. So, these two areas life, non-life asset management are real growth areas in India.

Q: I completely agree and therefore if I now in the context of the fact that you see a very positive outlook for India, you see the financial sector especially the other parts of the financial sector, insurance, asset management and other areas also moving forward in that context next 5 years for HDFC Group?

A: Business as usual. Keep growing all the arms of the company or the group.

Q: More excited about which arm?

A: All arms. We are number 3 in group, in life we are number 2, in individual we are number 3, we have a target to be number 2. In asset management we are the largest. Bank has done exceptionally well. So, I think we have some companies where we need to concentrate.

We have a company called HDFC Red which very few people have heard of. It is an online HDFC business. We are getting many private equity players coming and saying we will give you this value and that value. I do not see any value in it today but they see value in it. They see value in it so we have to take a decision what we need to do with those. We are building it gradually, it is 100 percent owned by us. We have some education loan that has done very well. Again there we have got PEs coming because we have 90 percent of it, that give us a chunk of that, a slice of that. Again they are valuing it although it is one and half, two years old. They are giving us fancy valuations. So, we have some options to grow some of these new businesses.

Q: When do you merge?

A: We merge in the long run. As I said to one of the investors, it makes sense in the long run to merge provided the circumstances are in our favour and there is no loss of value to either shareholders- either the bank shareholders or the HDFC shareholders. We are very clear.

Every analyst has already merged us. So, it is a fate accomplished so far as the analysts are concerned. However, we have recently raised money in the bank. In the prospectus we have said nothing about it. So, we cannot merge tomorrow because it is not fair, it is not ethical. So, I do not think it will happen in 2015. We have to wait to see the right opportunity when it makes sense for both of us.