HDFC Bank Chairman speaks of challenges and opportunities

HDFC Chairman Jayapriya De Silva – Pic by Kithsiri De Mel

By Sadun A Jayasekera

Q: The Government is trying hard to get the economy into shape and performance of the financial sector is key to future Government plans. Can the HDFC play a significant role in the financial services expected from your bank in 2016?

A: HDFC has a track record of over 3 decades in providing housing related financial support. Provision for housing finance includes housing construction, renovation, extension, purchase of built houses and purchase of land for house construction.

The year 2016 is going to be tough and at the same time a momentous year for the bank compared to the entirety of its past. The total value addition of the Bank in 2015 reflected a growth of 18% compared to 2014 and the value distributed to the employees increased by 23% which in turn is expected to improve the attitude of the employees towards the Bank. The bank distributed Rs. 512 million in taxes to the national economy in 2015 compared to Rs. 402 million in 2014.

The results as at end June 2016 show remarkable growth in assets, loan growth, savings and FDs. SME lending grew by over 50% in 2016. We are on track to achieve the product mix of 75% housing and 25% SME lending in a few years, compared to a 90% and 10% product mix in 2015 and the years before. In short, the Bank’s image is rising, particularly in the rural sector. We make full use of the Central Bank’s refinance schemes to reach the poor and the middle income groups and thereby help people build and repair or rebuild their houses and pay our loan interests through profitable business ventures we introduce to them through SME loans.

This year however, we expect alow credit growth due to early EPF settlements. There is a tendency for the banks large EPF customer base to make use of the previous governments’ decision taken end 2014 to permit EPF withdrawals up to 30% of the EPF balance. Additionally, increasing operational costs by about 26% and the reduction of the net interest margin is expected to make the bank’s profitability reduce by about 35% in 2016.

Therefore, infusing new capital as required by the CBSL is essential before the end of this year. Acapital augmentation plan is being prepared with a view to raising capital to Rs. 4 billion by 1st January 2017 and Rs. 5 billion by 1st January 2018. Our future aim is to support the balance sheet growth up to 2020 and maintain the capital adequacy ratio at a minimum level of 12.5% in the future.

During the years 2011 and 2015, the bank won several reporting awards such as National Business Excellence awards, Chartered Accountants Annual Report awards, ACCA Sustainability Reporting awardsand the ADFIAP Best Annual Report award 2014 for Asia & Pacific. The bank is now in the process of implementing a Core Banking System at a cost of Rs. 160million. It will come on stream by October 2016 when the existing IT system is upgraded with new and updated technology.

Q: What steps will you take to meet this challenge?

A: So many steps are being taken. We had the good fortune that the Ministry intervened to appoint a senior officer of the Central Bank as GM/CEO in February 2016 when the GM/CEO resigned in December 2015 after the trade union objected to his continuing after having reached 60 years (in December)despite the Ministry extending his service by one year to support the new Board who had taken office only in February 2015.Unfortunately, our Head of HR too resigned in December 2015 due to severe differences of opinion with the union. However, we recovered and took strong steps and rested control and infused discipline amongst a few people who needed to be disciplined, which is a sine qua non for any bank. 

We have appointed a well-respected consultant to support Treasury functions.An IT expert was also elected to the Board by the shareholders to fill the vacancy amongst the Shareholder directorate. He will oversee the Core Banking system roll-out due to take effect by October this year. This will upgrade and professionalise areas of MIS, transaction processing time and connectivity designed to improve our service levels to customers.

An elaborate medium term action plan is being prepared to improve the efficiency of the Bank. For instance, a well-structured four-year Corporate Plan is being developed for the period 2017 to 2020. The goal is to achieve a Rs. 100 billion Balance sheet and an asset portfolio of Rs. 60 billion. Currently, the balance sheet is Rs. 42 billion.

As said before, a capital augmentation plan is being prepared. We plan to increase the branch network from the present 38 to 60 by 2020. Work is underway for a recovery action plan to bring down NPL ratios. I advise our legal team in expediting recovery cases where required and quicken court procedures with our in-house legal team and externallawyers. A special Rating Committee has been appointed to achieve at least 2 upgrades during the period covered by the Corporate Plan.

Our future will depend on how successful we are after the changes in management with a new Head of HR taking office soon, improvement in work intensity and professional inputs into product management; Finance and IT are implemented by the two experts in the field of Finance and IT.

Improvements will highlight the need to strengthen the human resource needs and skills. I am very confident we are going in the correct direction and results are on the way. I am sure, the bank will achieve rich dividends in 2017 by the significant changes taking place in 2016. It will strengthen the assets and liability management of the bank. We will face the environment of fluctuating interest rates with courage and resourcefulness.

Q: The Government has announced plans to merge the SMIB with the HDFC Bank. How do you see the future of your bank?

A: We are ready to implement Government policy and are proactively engaged with our Ministry in this regard.The Ministry is well aware that it is not easy to merge a listed Bank with a 49% private sector shareholding. There are several options and approaches to either strengthen the HDFC or merge with another bank or do both. We will consider the bank’s stakeholders including the staffin successfully creating a strong bank for housing in Sri Lanka. A careful and a professional approach is being worked out by the Government and I hope it will be done sooner rather than later. We must eventually be like theHDFC Bank of India. The HDFC Bank of Sri Lankahas the potential to achieve the successes achieved by the HDFC of India.

Q: What is so unique about the HDFC bank?

A: The HDFC bankofSriLankais one of two specialised banks for housing in Sri Lanka. What is unique is that the HDFC bank is a State bank and the only State bank listed on the Colombo Stock Exchange. What is also unique is that it is a textbook model of a private-public sector partnership, with the Government holding 51% of shares and the private sector holding 49% shares. It is also unique because it is the only State bank that is under the regulatory governance frame work of both the CBSL and the CSE. As the State holds 51% shares, it is audited by the Auditor General and is supervised by the Ministry of Public Enterprise Development.

As a result of its strong private sector connections due to several private sector Directors elected at an AGM in addition to State officials appointed from various Ministries according to the provisions of the Act on the Board of Directors, the bank performs more like a private sector bank.

Originally, HDFC was incorporated as a building society in 1983by Prime Minister R. Premadasa who recognised the grave concerns of the poor and the middle income people and their right to affordable shelter. R. Paskeralingam was appointed the firstChairman of the Housing Development Finance Corporation of Sri Lanka Ltd. The Chief Executive Director was Chandra Ramu.

It is a coincidence that, I worked as a Chairman since 1982 in several Corporations under the Ministry ofFinancewhere Paskeralingamwas the Secretary and later directly under him as Director General of the Public Investment Management Board and as Legal advisor to the Ministry of Finance, and now find myself the Chairman of the HDFC bankwhilePaskeralingamis the Senior Advisor to the Prime Minister.

The first AGM of the HDFC was held at Lanka Oberoi on the 28th of June 1985. The audited accounts as at 31st March 1985 showed a net income of Rs. 110,769. After setting off the previous year’s loss of Rs. 102,551, the loss carried forward was Rs. 4,372. According to the Balance Sheet as at 31st March 1985, current assets were Rs. 18,018, 650 and the current liabilities were Rs. 9,037,487. The share capital was Rs. 14,695,628with 47,000 paid up shares of Rs. 100 each with a loan of Rs. 10,000,000 from the NHDA.

From austere beginnings, HDFCwas converted to a Public Corporation in 2000and became a specialised licensed bank in 2003. We were listed in the Colombo Stock Exchange in 2005. Following further amendments to the HDFC Act in 2011, the bank was given the freedom to diversify into new business domains short of opening current accounts.

During its momentous ride through three decades from humble beginnings, HDFC bank surpassed many milestones. It reached a Rs. 2,000 million capital requirement and Rs. 20 billion Balance Sheet in 2011 and reached Rs. 2.5 billion capital requirement in 2013 and a Rs. 34 billionBalance Sheet in 2014. The HDFCbankreached a Rs. 41 billion Balance Sheet and Rs. 3 billion minimum capital requirement in 2015.

During the years 2011 and 2015, the bank won several reporting awards such as the National Business Excellence awards, the Chartered Accountants Annual Report awards, the ACCA Sustainability Reporting awards, and the ADFIAP Best Annual Report award 2014 for Asia & Pacific. The bank is now in the process of implementing a Core Banking System at a cost of Rs. 160million. It will come on stream by October 2016 when the existing IT system is upgraded with new and updated technology.

Q: Sri Lanka’s financial landscape is becoming increasingly competitive. You admit that 2016 is going to be a tough year for your bank. Banks and Finance Companies provide similar products.Where do you think the HDFC can slot itself in this hostile atmosphere?

A: I agree. But, our task is to meet that challenge and not to sulk. There is enough scope for all the Banks to compete and survive. They have to reach the non-banking and offer their services with profits in mind and governments development goals in focus.

Iam convinced that the HDFC bank being a specialised housing bank with statutory access to other housing related loan schemes andventures and a supportive private sector Directorate on board, has a tremendous potential to succeed.The Government has special plans in this regard to help us to achieve our prime objective and mission and to be an important player in the field of housing finance.

In order to meet the challenge, I spend much time in communicating policy and providing guidance to the staff. In accordance with Board decisions, I help the top management to, with the necessary intervention, coordinate with different Ministries and State agencies to drive an accelerated assets growth in areas of Housing loans, SME and Project loans, open up a Premier EPF loan centre which will be a dedicated one stop shop for high end EPF loans and create a Project loan Division with a specialised staff to handle Project loans speedily.

My view is that the balance sheet growth must reflect growth from our core business and any growth from investments and other income will be only be a bonus.

Q: But how does a specialised housing bank like HDFC with a limited product portfolio gain a competitive advantage?

A: This is the challenge facing the Board of Directors of HDFC and myself as the Chairman.

Prior to 2013, the HDFC model was entirely housing finance based. We continue the Premadasa model. But, we find ourselves vulnerable when there are economic shocks and our clients do not pay back the loan. If we are to continue with housing only, the Bank will not succeed. Without low cost long term funds,we cannot give loans to the poor or the middle income groups on a long term basis at a genuinely affordable price. The mismatch between our assets and liabilities get wider when the interest rates go up. Ideally, I would like to give a housing loan at about 8%-9% interest to meet the reach of the poor or the middle income groups.

With the amendment to the Act in 2011 expected to penetrate into new business ventures as specified in Schedule (iv) to the Banking Act, etc., we came out of a difficult situation and began strengtheningthe business model to gain a competitive advantage for our business.

Ever since 2013 the Bank portfolio and its assets base grew. The profit in 2013 was Rs.158 million, in 2014 it was Rs.375 million and in 2015 it was Rs.493 million. Taxes paid to the Government grew from Rs.151 million in 2013 to Rs.402 million in 2014 and Rs.458 million in 2015. The growth in assets in 2015 was 22%.

By consolidating the progress in the year 2015 after the present Government assumed office, the Bank improved its competitiveness, but I must admit that under a specialised banking license, our business scope is still limited because we are not permitted to expand our products in to Commercial Banking.

On the other hand the HDFC Brand has a special appeal. There is famous French saying that, “If you do not want to get sunburnt you can live in the shadows”. Time has come for the Bank to go out of the shadow and get healthy sunburn.

I believe that if we are to grow as a specialised bank in a competitive and hostile environment, the HDFC bank must further review its business model from a purely housing finance entity and graduate to being a housing related financial service provider also. In 2015, our loan portfolio in Housing was 91% and the balance 09 % was spent on SME and others like micro finance and leasing etc. The Housing loan portfolio in the first 6 months this year is 90% and the rest is 10%. By end of 2016, I expect the SME sector to grow upto 12%.

We will strive to achieve a 75%-25%productmix in housing and SME loans respectively in the future. In order to achieve our mission, we will hopefully reach the status ofa “Bank on wheels” once issues of integrating our existing Palm Top staff is resolved before the end of the year.

Q: You are not a Banker. How do you see your role as a Chairman of a Bank and how have you been able to adapt yourself to your new experience being a lawyer and a Chairman of many State and private sector ventures in the past?

A: There are many non-bankers who have headed State and private sector banks with distinction in the past and continue to do so now. Although I am a lawyer and a Non-Executive Director of the HDFC bank, I am acutely aware of my responsibilities as a Chairman of a Bank. My previous exposure since 1982 as a Chairman in several State Corporations and CEO of Private Sector firms, has enabled me to acquire the relevant knowledge and skills to perform my job as expected of me. CBSL hasaccepted me as a fit and proper person and I follow the Corporate Governance rules and the HDFC Act, under which the HDFC bank is set up.

As a practicing lawyer and having been associated with politics ever since the age of 12, I have interacted with so many people- the good, the bad and the ugly. It is easy to manage if you are disciplined,transparentand honest. I believe the bank belongs to the people. The bank cannot survive without the support of the people and its shareholders. Chairman and the Board of Directors are the Trustees and have to manage the bank on behalf of all the stakeholders. In this regard, the staff has a responsible and a proactive role to play. The banks Trade Union too has a responsible role to play.If the bank is trustworthy, compliant, well governed and technologically savvy, I would have fulfilled my role.