HSBC India’s Stuart Milne: Govt needs to act decisively to fix the bad loan problem


New Delhi: State-owned banks, facing a crippling bad loan crisis, will eventually lose their market dominance as private banks step up competition, says Stuart Milne, chief executive officer, HSBC India. In an interview, Milne talks about the new opportunities for banks to grow, what is holding back private investment and his outlook for the economy. Edited excepts:

How serious is the stress in the banking sector?

The level of bad debt in the banking system is extremely high and the crisis is happening at an awkward time. On the one hand, banks are required to raise their capital ratios to meet Basel III capital requirements (meant to improve their ability to withstand financial and economic stress), and on the other, they are called upon to fund growth in the economy. In India, economic growth is funded more by banks than by capital markets. At the same time, loan demand growth remains sluggish. We are not seeing much new demand coming, even from retail borrowers who have been traditionally a strong contributor to loan growth in India. There is a lot of pressure on bank capital because of the need to provide for bad debt and at the same time, banks are struggling to meet that requirement. Government, which owns 70% of the banking system, needs to act decisively in fixing the problem.

Which are the sectors going out of favour and which are the ones getting capital easily?

HSBC is extremely conservative in its approach to risk. Our India business is the fourth most profitable business globally. We focus on sectors and customers and avoid unacceptably high credit risk. That is why we did not get involved in sectors under stress like infrastructure. We do a lot of business with our global clients and their Indian subsidiaries. Renewable energy is one example. HSBC is a global player in sustainable financing. But one has to be very selective as there are some very good companies as well as many start-ups with no track record.

Clean energy firms are placing aggressive bets in tariff-based auctions to win projects. How healthy is the sector?

There are some firm that are managing operations well. Renewable energy projects have a life of 25 years. It is very important to maintain them throughout their life as the infrastructure is exposed to harsh environment. If the company is very financially stressed, it is likely to compromise on maintenance, which could lead to problems. As a banker, I would say it is a hot segment because the government has a target of having 175 gigawatts (GW) of clean energy capacity by 2022. There is a lot of interest in India as the country is the third largest producer of carbon emissions and at the 2015 Paris conference on climate change, India agreed to cut emissions by 33% from 2005 levels. The challenge is that there are a lot of players out there and I hope bankers are being prudent and that we do not end up with another segment under stress. Renewable energy is still small in the global context of lending, not just for HSBC but for everyone. Global bond market is about $100 trillion and outstanding green bonds may be about $4 trillion. That is going to change. Total issuance in green bond market in 2017 may be about $150 billion worldwide, growing at over 3-4% over 2016. We expect it to grow in future to $600-700 billion a year. We see a lot of growth here and this segment is interesting to us not just as a lender but also as a capital market intermediary.

What are HSBC’s long-term plans in India?

India was the fourth most profitable market for HSBC in the first half of this year. We generate our capital internally for growth. What we are seeing is a secular shift in banking from public sector to private sector. If you look at insurance, state-owned firms were the only players in earlier days. Now private players have come in and have taken a significant part of the market share. The same will happen in banking. Eventually, government’s share in market will come down from 70%. Secondly, technology will favour large banks as they can afford investments in technology. We are very well positioned to grow amid these trends. That is why India is a key market for long-term growth for HSBC although in the short term there are challenges like a slower GDP (gross domestic product) growth rate (5.7% in April-June). We will continue to invest.

What are the growth triggers?

HSBC’s share of assets in the banking system in India is less than 1% but we are one of the most profitable banks in the country. (HSBC’s India profit was $460 million in January-June, a 14.4% jump from a year ago.) We are focusing on cross-border services to MNCs coming to India and Indian firms expanding overseas. Our global network helps in that. We build our corporate business around trade and investment corridors between India and countries such as the US, UK, China, Germany and France and vice-versa. These countries are big trading and investment partners for India. We understand the markets and the stakeholders to be approached.

Western governments are moving away from globalization. Would it reduce opportunities in lending and trade financing?

Brexit offers an opportunity for UK to diversify its trading partners away from Europe as well as expand existing markets. The UK government is trying to accelerate growth in the India-UK corridor. There, however, has to be a trade agreement and it may take some time. With respect to the US, visa availability is a challenge that Indian IT companies in the US have to manage.

What is your outlook on economic growth in India?

Our outlook for economic growth rate for the whole year has been 7.1%, until now. We will take another look. Manufacturing is extremely weak, which is worrying. While that does reflect to some extent the de-stocking of goods ahead of GST (goods and services tax) implementation, we have to see how much of manufacturing activity comes back in future. Our sense is that our forecast of 7.1% has to come down because we are unlikely to see a big bounce back in growth in the subsequent quarters. Private companies are not investing because they find no need to add more capacity. Besides, highly leveraged companies are unlikely to invest.


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