An MMS from Jamnalal Bajaj Institute, Mumbai, Mr. Paresh Sukthankar possesses a 15 years of rich banking experience. Mr. Sukthankar started his career with Citibank in 1985. He had worked in different areas of the bank including Corporate Banking, Risk Management, Financial Control and Credit for about 10 years.
In 1994, he joined HDFC Bank as head of Credit & Market Risk in HDFC Bank, India’s premier private sector bank. He has overall approval, supervision and control responsibilities for the bank’s entire risk management function. Mr. Sukthankar is also a member of the committee of Economists of the Indian Bank’s Association (IBA).
In an interview with Equitymaster.com Mr. Sukthankar spoke about the trend in the banking industry and HDFC Bank’s strategies to maintain leadership position in the face of increasing competition.
EQM: What is your outlook for interest rates? Does HDFC Bank’s recent move to reduce deposit cost indicate softening of interest rates going forward?
Mr. Sukthankar: As you know, in the last couple of years there has been a clear downward trend in interest rates. Initially lending rates came down, leading to a decline in yields on advances and investments. But somehow deposit rates remained slightly sticky. The reduction in small savings/PPF rates post-Budget however, triggered all banks to cut interest rates on deposits. We have also moved in line with the market in reducing interest rates although we remain competitive especially in short tenure fixed deposits.
In terms of outlook for interest rates, the general expectation appears to be that rates could move marginally downward in the near future driven by signals and rate reductions from the monetary authorities. Realistically however, interest rates are unlikely to be sustained below current levels in the long-term. As and when there are signs of an overall pick-up in credit demand or if there is any pressure on the exchange rate front, firming of interest rates cannot be ruled out.
EQM: How does the bank manage interest spread in the scenario of declining interest rates (has there been any re-pricing of lending cost in line with the reduction in deposit cost)?
Mr. Sukthankar: As I mentioned earlier, re-pricing on the lending side has been happening over a period of time. We have seen asset yields coming down in the last two to three years and this will probably continue this year also. Compared to past years, the advantage to banks this year is that deposit and call money rates are also coming down which means re-pricing of liabilities as well.
As far as managing spread is concerned, we have always believed that the line to control is the cost of funds, since the markets determine asset yields. The opportunity to improve yields on the corporate side tends to be limited if we don’t want to increase the risk profile of the portfolio. Some up-tick in yield can be achieved through the higher proportion of retail loans, which are managed on a product program basis. If managed judiciously, retail assets should result in a higher contribution even after taking into account the higher acquisition and servicing costs and higher delinquencies or credit provisions.
On managing the cost of funds, we focus on a couple of things. Firstly, our mix of transactional and term deposits is healthy with approximately one-third of our deposits coming from savings and current accounts, which are obviously lower cost. Secondly, on the term deposits our focus is more retail, which is relatively less price sensitive than the wholesale FD segment. Finally, we manage our asset liability tenures more closely. Given the short/medium tenures of our assets, we offer attractive interest rates for matching tenure liabilities. Since we don’t take too many long tenure deposits (our interest rates are also not the highest at the longer end), a substantial part of our fixed deposits get re-priced within a year. Overall therefore, movement in spreads would be a function of the declining corporate asset yields, change in proportion within corporate and retail assets, mix of deposits and the re-pricing of term deposits.
EQM: HDFC Bank is aggressively expanding its retail asset portfolio. What are the chances of bad loans in retail assets compared to corporate loans and in which area the ratio is high?
Mr. Sukthankar: There are different models followed for retail and corporate loans. On the corporate loan side you evaluate each credit in detail and try and avoid potentially weak loans. In the retail asset business you run a product program where you have relatively standard credit parameters, which are used to evaluate a large number of small loans and you try and contain losses on a product portfolio basis. Most of the retail loan products today are not new to the Indian market and there is a credit history for these in terms of typical loss levels. Over a period of time the element of potential loss for various loan products can be projected and priced into the product.
For example, if you build a car loan portfolio at a particular yield, you would factor in the costs you are incurring for acquiring and servicing the loans, and to cover the assumption of some credit losses. So will there always be higher NPAs in retail? Not necessarily, and the good part is that since the portfolio is well diversified across thousands of small, relatively homogenous borrowers, the delinquencies are more predictable. We make general provisions upfront for each retail product, as we book the loans. This would ensure that going forward, only if the actual losses exceed the projected losses (which are already factored in), would there be an impact on the profits. We have been in this business for about 2 years now and so far our experience has been good.
EQM: In FY01, HDFC Bank’s exposure to capital markets at 7.6% of outstanding advances was higher than the 5% norm required by the RBI. How does the bank plan to reduce the ratio in view of the sluggish capital market scenario?
Mr. Sukthankar: While the bank’s exposure to the capital markets was within the then prevailing regulatory guidelines, with the recent revisions in the cap to 5% of advances, we would have to achieve a reduction in this exposure. The guidelines themselves provide for banks to submit a schedule to the RBI defining the period within which the exposure would be compliant with the new guidelines. Fortunately, given the sluggish capital market scenario, requirements for guarantees or funding stock exchange members are lower and this would facilitate our achieving the desired exposure reduction.
EQM: Due to overall reduction in the capital market activity, float of the bank is likely to be on the lower side. How does the bank use this float?
Mr. Sukthankar: Our floats come from various products and segments like the cash management services and the retail business. The stock exchange settlement business is just one such source. Specifically, if settlements on the stock exchanges are lower, there will be some decline in the float. The floats are however, a function of the settlement and not the trading volumes. The float obviously reduces the cost of funds by reducing call borrowings to that extent.
EQM: Has the bank identified any other areas to compensate for the loss of revenues in capital market business?
Mr. Sukthankar: Our model has never focused on any one or two businesses. We have three broad franchises – wholesale banking, retail banking and treasury operations, and within each of these we have multiple businesses and products. This ensures that at any point of time we have a number of businesses where we are expanding the product range, geography or increasing penetration and market share to more than offset for any other segment where growth rates may come down.
EQM: What are challenges faced by the bank in cash management services (CMS) with the aggressive entry of public sector banks?
Mr. Sukthankar: While a number of banks claim to offer some cash management product, the CMS business has traditionally been concentrated with a few players. It is a volume and cost driven business and in our case it is driven by the quality of services, strong MIS and other product features and competitive pricing. Our technology and telecom infrastructure is naturally geared for CMS, since all our branches are linked, online and real time basis. We have been in this business for hardly around 3-3.5 years but we have gained a significant market share with total throughputs last year in excess of Rs 1,100 billion. We are adding more and more cities to our network every year, which will reduce our costs and improve our spread and servicing capabilities. I think we have a CMS product, which is clearly very competitive and getting better every year.
One point, you might notice is that most of the businesses we are in, were extremely competitive when we got in. For example, in the corporate banking business we targeted the top end, which by definition is the most competitive in any country. A number of other players went in for the middle market because it is relatively under-banked and offers higher returns with lower service expectation. We have built credibility in the top segment despite intense competitive pressures. So I don’t think that we are apprehensive about competition in a product like CMS either. We have to respect and recognise competition and be proactive to remain ahead.
EQM: A word on your favourite books?
Mr. Sukthankar: I hardly get time to do non-work related reading but I love to read comics like ‘Tintin’ and ‘Asterix’, which my kids get home. Given my time schedules I prefer unwinding with music than with books.
EQM: Any personalities that have influenced you?
Mr. Sukthankar: No doubt, I have gained personally, and professionally from interactions with various people over the years. But I think the strongest influence in my life has been of my immediate family.