NRI deposit rate deregulation won’t have a huge impact: Stuart Davis

Stuart Davis, chief executive officer, HSBC India, believes in the India growth story. Yet, in an interview with
Vishwanath Nair, he expresses concerns about the macroeconomic headwinds which may play spoilsport in the coming years. Edited excerpts:

What are your plans for the growth of retail and corporate banking businesses in India?
This half-year, our profits are up 33%. What has been particularly pleasing is the performance of our retail banking business. Although we had some problems two years ago, we have now moved towards profitability.

The stress has been on wealth management, and we continue to distribute mutual funds aggressively, where our business is growing strongly. We are strong in mortgage lending, which has taken some time to pick up, but is now growing substantially.
On the commercial banking front, we continue to focus on international customers and trade finance business, which we expect to be our areas of growth.

We have had a strong year in our global banking and high-end corporate banking business. What we have found is that most of the demand has been for external commercial borrowings (ECBs), other than domestic funding.

So, though our domestic loan assets have not grown sharply, we have witnessed strong growth in ECBs which are booked offshore for our bank.

All in all, 2011 has been a good year and we are well positioned for good performance in 2012, despite some of the headwinds that are present.

What are the headwinds you antici- pate in the coming year?
The key ones are the offshore events, particularly in Europe, and their impact on India. We have certainly seen offshore allocation of investments moving towards defensive investments such as bonds and cash. We have seen a lack in foreign institutional investment inflows and also a slowdown in foreign direct investment (FDI).

The other headwind is obviously high inflation which has led to higher interest rates here. Owing to the paralysis of the government’s decision-making process, some projects have been stalled and it also has had a negative impact on offshore investments.

Recently, the Reserve Bank of India (RBI) deregulated interest rates on the non-resident external rupee and non-resident ordinary accounts. How will this benefit your business?
I think it’s relatively neutral. The success of the NRI (non-resident Indian) business has been on the back of our global presence and ability to serve investors in home markets as well as elsewhere.

So, while I think deregulation will be positive for our business, I don’t think it will have a huge impact.
There are certainly other factors which are affecting NRI deposits here. I think when the NRIs are confident that the rupee has stabilised, then we will see an increase in deposits.

 What are the key growth drivers in India? What kind of customer base are you targeting here?
For us, the key drivers have been multinational companies which are setting up operations here in India, and this will continue to be the area of growth for us.

Our trade finance business is also a strength as our international presence gives us a competitive advantage. Our primary focus is on the mass affluent customer base. Our mass market propositions will be focused on credit cards.

There have been reports lately that you are planning to cut down your workforce in India. What do you have to say?
Unfortunately, there has been some incorrect reporting. The group announced that it will be doing an efficiency review, back in May. So that is going on in some countries including India.

Do you have any expectations with respect to the banking regulations in India?
Well, certainly we would like to continue to see the deregulation of markets. What I guess is that we were following a roadmap which was devised three or four years ago and was put on hold when the Lehmann collapse occurred in 2008.

We would like to see some of that going forward, particularly some deregulation in the bond markets. This would enable the development of a robust and efficient corporate bond market in India.

I think that is very important for funding infrastructure projects and also the medium- and long-term needs of companies in India, which are better served by the bond markets rather than by banks themselves. 

In comparison to the global banking scenario, where does India lag?
There are constraints in terms of opening up the branch network, regulations around deposit rates and also around priority sector lending. The reality is that since these will stay with us in the foreseeable future, we will have to accept it as a fact of life. Otherwise, I think India has a very robust banking industry which withstood the major test of 2008.
Therefore, I think that the tight restrictions in India have helped the banking industry to come through that difficult period of time (relatively unscathed). So, I think changes in regulations will be slow. The regulators would be very conscious of the fact that India went through the global economic crisis in 2008 extremely well.