Aditya Puri, managing director of the country’s second largest private sector lender, HDFC Bank, believes raising of rates would not suffice to control inflation; instead, it may slow the growth of the economy. He tells Somasroy Chakraborty how HDFC Bank plans to sustain its growth in this period of elevated interest rates. Edited excerpts:
Policy rate hikes haven’t had the desired impact on inflation so far. Do you expect the Reserve Bank of India (RBI) to continue with this policy?
I would have liked it if this (latest policy rate rise on May 3) was the end. I don’t think a further rate hike is necessarily the proper solution for inflation. We also need fiscal measures. We need to reduce our fiscal deficit. In the short term, we need to review why currency circulation is going up and how much pressure it is creating on demand. If we agree that some of the developmental schemes are not reaching their intended beneficiaries, why double the outlay? It is unfair to expect monetary policy alone can tackle inflation. Beyond a point, it becomes counter-productive. A lot of supply-side issues are there.
Do you think high rates will impact the investment demand?
It is good to have recognised that last year, the growth was 8.6 per cent, with the run rate now somewhere at 8.3-8.4 per cent. So, no way will the economy expand at nine per cent this financial year. Even without the rate hike, the growth would have been 8.3-8.4 per cent, at the best. With this latest hike, growth will come down to eight per cent. So, demand will obviously be affected. The industry is also not sure if this is an end to the rate increases. When there is uncertainty, investment does not happen. Companies have to review their own efficiencies, as cost of funds will rise.
They (companies) must understand banks are commercial enterprises. To ask a bank to reduce your interest rate in this environment is like telling a company your raw material cost has gone up but don’t pass it on to your clients. The companies will have to take a decision on whether they want to maintain their market share and sacrifice margins to a certain extent. In most businesses, you don’t really give up your market share. I do expect there will be some pain.
Will HDFC Bank’s growth be affected because of this?
The bank, fortunately, is in a situation where demand exceeds supply. Arguably, we are either number one or two in most consumer lending products which are loans to retail clients, small businesses and farmers. This part will continue to grow. In corporate banking, we are largely in working capital finance. When inflation goes up, profitability of customers may come down but demand for bank funding for working capital goes up. We have never been a major player in infrastructure lending, which is likely to slow down. If the economy grows at eight per cent and the credit multiplier is two and a half times of GDP, then credit growth for the system will be 19-20 per cent. We will gain a couple of per cent more than the system because we have been gaining market share continuously.
Will you be able to protect your margin as you grow your balance sheet in this environment?
Every time rates go up, there is a big noise that banks are dead. The margin only goes down if you are unable to raise your lending rates. The increase in savings deposit rate will cost us 12 basis points more but we will raise our base rate soon. I don’t see any major pressure on our margin. We will continue to maintain our margin in the range of 3.9-4.2 per cent.
You are often accused of being conservative. With your biggest rival, ICICI Bank, now back on the growth phase, how do you plan to increase your market share?
I wish ICICI Bank well, but they don’t really affect our growth rate. There is enough business for everybody. I will not call us conservative. We are prudently aggressive. If you are not prudently aggressive, the ruins and graveyards around the world are there for you to see. Banking is not an aggressive business. It is a business where I will want my product back with interest.
What is the progress on merger between Housing Development Finance Corporation (HDFC) and HDFC Bank?
A merger between HDFC and HDFC Bank will have to be beneficial for shareholders of both parties. There is no impending need because we are using the benefits of the bank’s distribution and HDFC’s processing capabilities. At this point, with the current regulatory framework, a merger does not work out. If the regulatory concessions come, we will have a look at it.
Are you open to acquisition?
If we get a good deal, we will look at it. But nothing is on the cards, not at the prices the small banks want.