Source:CNBC-TV 18 :Sep 13,2011:
Increase in non-performing assets is the greatest danger banks faces in the near-term. In fact, experts say that the market has already discounted the RBI action expected on September 16th, but fear of growing bad loans plagues the banking space.
Speaking to CNBC-TV18 in an exclusive interview, Aditya Puri, managing director of HDFC Bank says that a marginal increase in NPA is a possibility, but it is not alarming. “NPAs may go up by 25bps, but it is not a major concern,” he says. He sees no stress on the bank’s portfolio for now and is not too concerned about asset quality or fee-based income at this point.
“Margins will most likely remain between 3.9% and 4.3% and we expect credit growth to continue to be around 25-30%,” he says.
On the broader economy, he says that GDP could come down to 7.5% from 8.5%. “Growth at the end of FY12 could be closer to 8% as we near the end of the rate hike cycle,” he says. He reiterated that rates are, however, unlikely to begin declining before FY12.
Below is the edited transcript.
Q: The concern for the market has been that this year might be challenging for private and public sector banks with asset quality, given where interest rates are and the general economic environment. Do you see that as a problem for the sector?
A: Frankly no. We must understand that when we are talking about a slow down we are talking about a marginal slowdown at best. A slow down from 8.5% to even 7.5% is not such that it will cause major concerns on the activity side.
As far as the interest rate is concerned, yes, whenever the interest rate rises and the economy slows down there is some marginal increase in NPAs. But it is not a cause for alarm.
The other issue that people have expressed is concern about certain projects. Some of the projects may face some difficulty or restructuring, but I do not think on an overall basis, the increase in NPAs would be such that it should be a cause of concern in terms of the absorption capacity of the banks.
Q: Would you say that is a warranted fear that some of these pockets such as SEBs or agri-lending are opening up greater pressure than banks earlier thought they might be?
A: I think some of these concerns feed on themselves. I remember in 2008, there were a couple of analysts who NPAs in India would double! I think you should have an audit on the projections of the analysts as well.
Now, as far as agriculture is concerned, we have a good harvest; we have talked about certain issues forever, but we haven’t seen that much of a spike. Let me repeat again, you will see some spike, but gross NPAs are three for the system, net NPAs are about 0.9. They could go up about 25 basis points here and there.
So yes, there will be a marginal increase but all that has happened from 8.5% to 7.5%, there is a good agricultural harvest. I don’t think there will be that many problems and when you talk about SEBs, yes there could be some issues, but they will be worked out over the long run. Frankly, the demand for power is there. So everything doesn’t necessarily have to fall back into an NPA.
Q: The competitive environment has gotten much more intense for banks such as yours – is that a real threat aside from slippages that growth itself may be coming off?
A: Some growth will definitely come off. If the GDP goes from 8.5% to 7.5%, there is a multiplier of credit growth-to-GDP, which is about 2.5%. That amount of growth will come down. But if your question is on HDFC Bank, no, we are not that concerned. You must understand the way our balance sheet is structured- it is 50% retail, 50% corporate, and we are not that much in infrastructure where you have seen some amount of slowdown. So will the growth slowdown from the level of about 29-30%? Possible, but we normally say we will be between the 25-30%, and I do not see any reason for a problem there. We are seeing no stress on our portfolio for now.
Q: Any issues about margins propping up during the course of the year given the high level of deposits or rate of deposits?
A: I was wondering when you would also get worried.
Q: Not worried, I want to hear reassuring things from you...
A: Okay. On the margins, there would be some pressure but I think a large amount of the pressure is over because I don’t think any bank is increasing their deposit rates at this point of time. In fact, even if there is, say, 25 basis points increase in the rate by the RBI, I don’t think given the fact that in our view the interest rate cycle is peaking out, there will be a pass on of that increase.
Q: Let me ask you about the fee-income side of the business. How would that do in a scenario where things are a little bit more sluggish?
A: That depends on the composition of your fees. If a large portion of your fees were from mergers, acquisitions and projects, then yes, you would have some strain. We are not major in infrastructure projects; our fee is spread across about 20 lines. So there will be some impact on the fees but not anything to be concerned about.
Q: Which one would you say is the one HDFC is most keenly focused on over the next couple of quarters – whether or not growth can remain intact, whether margins may come under pressure, or the much talked about risk of slippages?
A: We do not have major concerns with growth. We feel that at a worst case scenario, unless no actions are taken in Delhi, you will still at least have a 7.5% to 8% growth. You take a multiplier of 2.5% and that comes to about 18-18.5%. We grow a couple of percentage, maybe 5-6%, by gaining market share. We see no change in that scenario.
As far as our margins are concerned, we have always said we’ll be in the range of 3.9-4.3%.
As far as slippages are concerned, our portfolio, even for us, has behaved surprisingly well. So I do not think that is a concern in the short term. In the long term, I have always said that in financial services, India offers the best opportunity. Demand exceeds supply here. I don’t see any reason to change my views.
Q: How much do you think growth may actually get impacted by on the GDP level due to the consecutive rate hikes by RBI? Are people being alarmist when they talk about a sub-7% rate or would you say observing what you have seen in the economy that could be a reality?
A: As of now, we do seem to base our analysis on a lot of statistics, which in some cases, go year-on-year, and shouldn’t be that much cause of alarm. If you look at the tax collections etc, then the GDP rate seems to be quite fine. Either way, we have had a GDP growth rate of about 7.7% and this is without any investment demand kicking in.
My own view is, given what the government has been saying, you will see investment spending, you will see a better second half, you will see better growth in agriculture and in services. You may see some reduction in industrial growth.
So overall, I would say somewhere between 7.5-8.5% while the rest of the country have been doing fine and everybody takes pride. I think the government is now very sure that they are going to contribute to this growth. So if we get investment going, I would be close to the 8% with 25 basis points here or there.
Q: I heard you say that even if there is a rate increase from the Reserve Bank, it might not get translated. Would you go as far as to say that lending and deposit rates in the system has topped off then for private banks like yours?
A: I would say not only for private sector banks, you have also seen State Bank announce their schemes under car loans. We probably have to content with, but the issue is, I do believe that we are at the end of our inflation period and RBI has intent to control inflation. However, we will see a high inflation number, so they may not have an option but to raise it by about 25 basis points.
To answer your question, yes, we are at the turning point of the cycle and you will see declining interest rates. You will see competition in the market, so it will be very unlikely that the banks raise rates and deposit rates.
Q: What is your best guess of when interest rates actually begin a down cycle again?
A: Not before the next fiscal year.
Q: Is that April or is that further away?
A: If I was that good, I would be sitting home and making money.
Q: The second part of your statement is probably true.
A: Let me give you my reasoning behind this. Basically, as a combination of what is happening globally, to commodity prices, to oil prices plus the agriculture harvest that we are going to have and the base effect, you would probably see inflation down to about 7% odd category by March. Everything else remaining equal, I think you can start to see some investment as well. The emphasis shift from inflation-control to growth and that’s where whether it’s in the April quarter or it’s in the July quarter, I really don’t know, but downward, it will come.
Q: How much of a come down do you expect on corporate rates, the one that is really hurting the equity market as well?
A: Here again, lot of people cry wolf and that is a bit of an issue. If you take the consumer goods industry, interest forms 4% of sale. So 2% increase on 4%, I am sure that is not the end of the world.
As far as infrastructure is concerned, it is a 7-10 years cycle and interest rate goes up and interest rates go down. On an average basis, they will achieve the same. Yes, interest rate is a factor, but as I was talking to Deosthalee, it is not the only factor. To me, more important than interest rate for infrastructure etc is, to get the other things right like land acquisition, supply of raw material and speedy implementation of projects.
That said, I also think interest rates will come down, you will see an overall decline in the yield-curve once inflation is brought under control. I do not think anybody can’t take this much of a hit. Too much is made of interest rates being the sole functionary of slow down
