Puri: I think people are overreacting on the economic slowdown in India, especially media and industry. I have just spent the morning convincing a foreign banker that things are different in India and the fears of foreigners are exaggerated. India is basically a story of domestic demand. The only local issue, if at all, that we have is how the real estate story is going to play out and what we are going to do on our export front. At 5.5% growth rate, we don’t have a crisis.
ML: How bad is the real estate scene?
Puri: There are multiple points of view here. But what we must remember is that Dr YV Reddy (former Reserve Bank governor) stopped banks from funding land purchases. Banks could finance land or construction projects, but the major portion of the money went into buying land. Developers raise finance for land acquisition either from real-estate private equity funds, finance companies or mutual funds. So if people are looking at banks’ exposure, they must remember that banks have not been allowed to fund land for almost three years. We (HDFC Bank) don’t have a large exposure to real estate, but even for banks that have, RBI has fixed the downside. From the consumer side, or the buyer side, 75%-80% of the demand is from actual users and only 20% is from investors who hope to make money, when the price rises.
Thirdly, we don’t have the US system where you can simply walk out of your flat and that is the end of your liability. We follow the British system where you are liable for the shortfall even after the sale and can be proceeded against. Fourthly, during the 2005-09 period, real estate prices rose 400%. So it is only the last lot, those who came in at the peak rates in the past six months, who would have any incentive at all to walk out. You will also see that the good buildings in favoured locations have not suffered much of a price decline. So, is real estate a problem? Yes. Is it a big problem for banks? Not as much as it is made out to be. Have property prices dropped as much as they should have? Some places, yes; some places, no. But wherever builders have dropped prices, they are selling. When Unitech dropped prices for a project in Delhi, they managed to sell in four days.
ML: Are the developers out of the woods?
Puri: Some of the big ones have managed to get money. Some developers have brought their own money back from abroad. Many of the private equity guys are likely to lose; but, as far as banks are concerned, loans may only have to be restructured, because they have land as security. And, even if there is a loss, it won’t be more than 25% or so. It’s not the end of the world. Real estate prices have dropped 35%; but that is just not enough. Developers are not willing to listen at the moment; it will take at least six months before the squeeze forces them to bring prices down. In fact, realisation will come only when payment needs force a decline in prices to meet over-leveraged obligations. After 31st March, lenders too will have the whole year to work on them. Across the chain, the problem is that prices have not dropped.
ML: How is the mortgage portfolio? Are people able to meet their repayment obligations? Job losses have just started to happen. Will that have an impact?
Puri: Yes, on the mortgage portfolio, people are paying. On job losses too, it is not so much that people have lost jobs as the fact that no new jobs are being created. So the losses are mainly for those who were on the margin and were hired on a contract basis. They have been asked to go en masse. But those are not the guys who took mortgages – they weren’t getting loans so easily. If lenders have not maintained a proper loan profile, they may have a problem. Incidentally, banks and insurance companies are hiring even today; two-wheeler companies are also hiring salespersons.
In fact, we are not even facing a strain on our personal loans (a clean loan portfolio) because we never went downmarket. We said we will stick to this credit profile and take whatever business comes our way. Have we had an uptick in delinquencies? Yes, of course. When you go from a growth rate of 8.5% to 5.5% or whatever, delinquencies are bound to increase. But they are within the specified parameters. Credit cards and personal loans have higher delinquencies.
ML: What are the numbers like? On the mortgage portfolio, you used to be under 1%; what would that be today?
Puri: If you take the overall banking system, the gross non-performing assets (NPAs) used to be 3% and net was about 1%. If you take the worst scenario, it would be 4.5% and 1.5%, respectively. Within that, it will differ from one bank to another. We are not seeing any strain; our increase would at best be 10 to 20 basis points. So we have gross NPAs of about 1.7%. We may be around 2% at the end – not straightaway – but at the end of the cycle. And net NPAs would be around 1% to 1.2% – that’s all. The question that some analysts have raised is whether India is missing the point and being too optimistic. But what are we being optimistic about? The point is, we have slowed from 8.5% to 5.5%, that’s all. But that is good growth. We are saying we have issues on exports and employment generation, but we don’t have the holocaust that has happened in the West. In fact, I am still saying that they have not seen the worst yet. Till now, it seems that their governments will be able to bail them out, but if they can’t, there will be a serious problem.
We, in India, don’t have any systemic issues. NPAs will go up due to job losses, in retail industry and they will go up due to the decline in exports in the wholesale industry. To an extent, they may go up due to auto ancillaries, but even that will not be much. Even if we are affected further by what happens in the West, growth may drop further to 4% – that’s all.
ML: Which do you foresee as the good sectors and bad sectors?
Puri: You will definitely have a problem on the exports front. This does not include information technology (IT) in the sense that IT will have a growth problem but not a sustainability problem. There will be an issue if telecom, financial sector, hotels, etc, have a problem. Then spending on IT will reduce; growth will slow down; and margins will be lower. In auto ancillaries also, I don’t think there will be a whole lot of unviable units. There may be a squeeze and some may suffer marginal losses.But I feel that auto manufacturers have to take some responsibility for this; they are squeezing the suppliers too much. On the whole, Hero Honda is selling well, so are Honda (cars) and Maruti. Steel prices are down, so is fuel and that helps. Petrochemicals may be a little slow and refining margins may be down. But, the cement guys have the guts to raise prices, even while they are crying about a decline in demand. All the consumer and personal products companies like Unilever and Godrej are selling. Steel is selling; pharmaceuticals are selling; and, in auto, other than trucks, everything else is selling. I hear from Voltas that air-conditioners are selling very well. And all this is when the Pay Commission revision benefits have not even been fully disbursed to public sector companies or to state government employees. When that happens and they receive the arrears, there will be another boost in demand. The infrastructure sector has also seen a pick-up.
ML: How do you explain the demand for auto?
Puri: There is a demand. OK, you guess this right and I will give you a prize: what is the interest cost as a percentage of sales for 90% of Indian companies? Guess what, it is just 4%. Interest cost as a percentage of revenue is just 4% and as a percentage of cost it is 6.5% to 7%. So it can’t be just an issue of interest rates. That means a 1% difference in interest means just 0.3% difference to your cost. If steel and fuel prices have dropped substantially, then why are companies not reducing prices? They don’t want to take a one-time hit on inventory. But it is easy to keep saying that banks must reduce interest rates. In the rest of the world, the markets have frozen and bank lending is not happening at all. That is not true here. If interest rates have come down – and they constitute only 4% of the costs, then why aren’t your costs coming down? I think Indian industry protests a bit too much.
ML: Are interest rates acting as a constraint to growth?
Puri: On interest rates too, I think this focus on PLR (prime lending rate) is an outdated concept around the world. It is nonsense. If you look at lending, consumer loans are not linked to PLR; corporate loans are not linked to PLR; it applies only to 10%-15% of the borrowers who insist on linking the rate to PLR and then say that it is not transparent. If you keep that aside, housing loans are back to the level they were two years ago at 9%-9.5%; consumer loans are at 11%-11.5%; and personal loans are at 13%. So interest rates are down 200 to 250 basis points, but nobody says anything about that. Indian Oil is borrowing at 6% when it borrowed at 12.5% some months ago.
ML: What about the worry that government borrowing will pre-empt funds that would have been available to industry?
Puri: That’s nonsense! When will they pre-empt? The government is already borrowing and there is Rs100,000 crore lying in reverse repo. And why are we forgetting that there is going to be very little oil and fertiliser subsidy next year. So net borrowing is not going to be so high. The problem is that everybody is indulging in scaremongering. Instead, I would like people to look at the positive aspects; this is one opportunity for us to say we are different from the rest of the world.
ML: Are companies appreciating the fact that things may be looking up, but we won’t have the ferocious boom of the past five years for a long time to come?
Puri: Well, people are appreciating it but not yet accepting it. There is just the beginning of the realisation that the Sensex is not going to be at 20,000 and they can’t wait for it to climb back to that level before making an IPO and fixing the price. The average PE multiple is around 7 today; it will double at a Sensex of 20,000 and that will not happen for another two years. The first sign of acceptance of the slower pace of growth will be when a few companies decide to float an IPO. They are also not accepting that interest rates cannot drop much more from here – not more than 50 to 75 basis points – so they are not going for long-term bonds. They will have to accept it in the coming months.
ML: Your closest private sector competitors will see a change in leadership, while the PSU banks have gained in credibility during the crisis, because they are government-owned. How are things going for you?
Puri: Last year, State Bank of India (SBI) collected Rs50,000 crore in deposits, we collected Rs30,000 crore. So, is there a flight to safety? Yes. Is there more shine to the public sector today? Yes. Is it at the cost of the private sector? I would say no. We are second only to SBI. We have received a tremendous flow of funds. If some of the private sector banks are not growing, then a part of that growth has indeed gone to the public sector.