Aditya Puri, managing director of HDFC Bank, in an exclusive interview with CNBC-TV18 on Thursday, discussed the succession plan and various other aspects of its strategy. He said ethos in banking and in the digital world is that all have to work together as a team. He added that the bank wants a change because telecommunications, computing, social mobility, artificial intelligence (AI) are coming in, and Amazons and the Apple Pay took good advantage of this opportunity.

According to him, the bank could also do it to change its systems -- processing, credit, marketing, technology everything -- and it has come up with superior offerings that could compete with Amazon or Google and provide better service.

Q: The HDFC Bank stock has underperformed - the Nifty itself and its own previous record. People are really worried about succession. How quickly will the successor be in?

A: Two parts. One is, I think it has overblown the worry on my succession. I am very thankful that people believe that I can run this bank alone or I am the prime driver.

The brightest moment I have is when I find a young guy at any other branches telling me what to do and he also understands all these strategies. So, succession for us is not a one-time affair.

The ethos in banking and in the digital world is you have to work together as a team. You deliver the brand at the customer touch point, you have to remove the hierarchies ... we have started working about two and a half years ago on this.

The change we want in the bank because we saw telecommunications, computing, social mobility, artificial intelligence (AI) coming in, Amazons and Apple Pay took good advantage of it.

We thought we could also do it to change our systems -- our processing, our credit, our marketing, our technology everything -- we have come up with the superior offering that could compete with Amazon or Google and provide better service.

Q: This is a big fin-tech challenge that banking everywhere faced and HDFC Bank came out as the winner in this battle – that is why people are worried about succession. The first question that people who have invested in HDFC Bank ask me is – is it definitely an internal candidate?

A: No, absolutely not. Otherwise we won’t have appointed a search firm. We were very clear and I think I have been saying this very clearly that we have very strong internal candidates because as you said yourself the transformation of the bank has been done and if anybody thinks it’s been done by me alone is living in cloud cuckoo land.

There is a second-layer of management and then most change fail so we put the very senior person as a strategic change agent and I am delighted that we were able to execute that change and it is working perfectly that – 1) the change is projected as a vision 2) the strategy and 3) all 130,000 of our people buy that.

Q: So, are you rooting for an internal candidate going by what you are saying?

A: I am rooting for the best candidate. So, I am saying an internal candidate is good because he would know the people, he would know the system etc. and his acceptability is higher. So, when you go outside you obviously look for that exception.

Q: I will tell you what analysts tell me about HDFC Bank – an external candidate like an Elon Musk or the big CEOs, a Steve Jobs are definitely something that people will like. Their belief is that your internal second liner are not Elon Musks.

A: And not am I.

Q: They think you are.

A: That is good for them.

Q: That is why the stock is underperforming. Do you think by rooting for an external candidate you are keeping away the Elon Musks?

A: Absolutely no. That is what we said that we want to make sure that we hire the best candidate -- internal or external -- and there is a misconception that I do the vision, I do the strategy, I do the execution is what I am hearing from you. No, it doesn’t work like that.

I wish I knew everything about technology, the last mile distribution, I wish I knew about how the merchant functions. No I don’t. So it’s a team. I am the first among equals and they are so many.

You must have read about our head of retail credit moved as CEO for TransUnion and Nitin Chugh moved to Ujjivan Small Finance Bank. So, we have depth 3 ways down because we have collaborative management. I am not a top down boss.

Q: You have said already in the past few days that you and Deepak Parekh are on the same page but the doubt refuses to go away. Are there two opinions in the board?

A: Absolutely not. Let me be very categorical. Firstly, Deepak Parekh and I have known each other for forty years so if there were differences, I would have known about it.

You can speculate, somebody is saying, I don’t want to take names, that guy hasn’t even thrown his hat into the ring and somebody is saying that he is supporting.

I think that is ridiculous. So, we will never be able to solve the rumours. I am telling you categorically, Deepak Parekh and I both have same interest for the best guy to come in whether it is external or internal and there is nothing that this one prefers internal, that one prefers external, nothing of this sort.

There are no two opinions in the board. The board unanimously gave the criteria and attributes that should be looked at and yes we have strong internal candidates but you can look at candidates who have the status so that they can be accepted internally.

They are going to come back and we should – around April and latest by May – be in a position to put our application in.

Q: Would you be the first among equals when it comes to weighting the preferences or would you have more of a say?

A: I don’t know, I would like to put it this way that I am sure they would find my opinion valuable.

Q: How quickly will it get resolved because no matter what you say, the stock is underperforming because of the uncertainty?

A: Absolutely. I agree with you – no two ways about it. It will be resolved by May. All I am saying is that the rumours are – we can address them to some extent. You would agree that we have got the strategy for the next four-five years with minor tinkering that is there, the strategy has been done by the team, we have executed it, it is working on the ground, we have a situation where demand for our products exceeds supply, so we are sitting in a very good position.

Today we are in a position where in a click of a button we can offer you everything which is exactly what we said we would do. So, there must be some competent people inside, there must be some competent people outside.

Q: Did you consciously groomed someone?

A: I think everybody gets groomed in the way we run our bank. The meetings are participatory. I may fine-tune somebody’s idea but if anybody thinks I am the sole generator of ideas – give me a break, I come at 9:15 am, I leave at 5:15pm, I go home for lunch. If you think then I can do all of this then I must be working in my sleep.

Q: Since we are talking about fabulous 25 years and more of your career ... what is the winning formula?

A: The winning formula is when you run a living organisation. A living organisation means an organisation that is run on a participatory basis where people are empowered and based on that are willing to jointly work on change every three-four years.

So, when you look at 25 years, we don’t look at it as 25 years. We started as a corporate bank, we went into retail banking, then we came to this scale on the corporate side ... then we went into semi-urban and rural India ... then we became digital. In each case, all of us have worked together as a team and that is why we call ourselves a living organisation.

The only reason we were able to deliver and I would like to thank all of us who worked together as a team, agreed on the objectives and then marched to one goal. That is the reason for success and we take great pride in that.

Q: Let me ask more or less the same question in another way or forward looking. Sachin Bansal has clearly indicated that he wants to be a banker, he has already teamed up with a non-banking financial company (NBFC), applied for a license. Now, if he has to be the next Aditya Puri or if he has to create the next HDFC Bank, what should he do?

A: He has a lot to do.

Q: He is a fin-tech (guy) already.

A: Fin-tech is like this. Let me tell you one thing – there was this joke that was there. Latha is going to make 'gobi' so I said okay, we will have 'potluck', I will bring all the stuff. So, I brought all the stuff, salt, oil etc, but I forgot to bring 'gobi'. Can you make the 'gobi'?

So, if you don’t have a customer base, if you are not real in the real world.

Q: The 'gobi' is the customer or the 'gobi' is due diligence and banking talent?

A: No, the customer. So, if you have fin-tech, who you are going to sell it to? Your grand pop. So fin-tech is an enabler. What is the issue, why is Amazon spending, what is money burn called, they are spending to acquire the customer. If you don’t have the customer fin-tech is useless.

So yes, you can setup the technology, but then you better be prepared to pull in a lot of money to acquire the customers. To acquire the customer as I told you we have been working differently, and that is where when people are empowered when we listen to the frontline.

The frontline is what changes our procedure. What does the customer want? Can you deliver it in the way he wants? I wish him all the luck, but I think he has got a long way to go and I hope he has very deep pockets.

Q: You all were worried about unsecured retail credit, is that a worry at all?

A: No, we were not worried, the analysts were worried about unsecured.

Q: You all also provided more for that?

A: Providing is good banking, so let me explain the banking as we see it. Our unsecured credit - firstly unsecured credit properly managed is no different from secured credit and the correct definition for unsecured credit is cashflow lending, which is what have proved successful all over the world.

So, when we say unsecured we are looking more at cashflow and property as a second way out. A large part of our unsecured credit is loans to our salaried customers - almost 70 percent. The balance is to a small shopkeeper, now you come from a small town like I come, the 'baniya' there is - his pop was a baniya and his 'grandpop' was a 'baniya' and they normally don’t default because they are not leveraged.

So, you actually make an analysis of what is the cashflow and what could cause you and it is granular.

So as long as you have the right rate of interest, you have the right operating cost, you budget right, default rate comes to risk adjusted, it comes to the same.

So we are not worried, it is doing well and I think we should move to cashflow lending in this country, too much emphasis on security is leading to a lot of great sectors that requires credit not getting it.

Now we come to the provisioning, we are conservative guys for provisioning. If we see something and if there is an issue we have provided as we said because of agriculture on the loan waivers etc.

We have provided some on the commercial vehicles, we have provided some contingency for telecom, we have provided some contingency for NBFCs and yet we produce the profits, so you should be happy.

Q: Are you worried about any known unknowns, say a real estate or something that can or telecom - what is your exposure, you expect that to be a problem.

A: Firstly, in real estate we are not into, hardly I mean, it is such a minor percentage that we don’t even mention. We have real estate but the way it is classified it is not actually a real estate – it is where we have lend to business banking and real estate at the collateral security.

Now coming to telecom, majority of our, in fact, all our banking exposure is to the top two good names, which I think will survive. We have some bond exposure to Vodafone Idea and that is well provided for.

Even our other portfolio actually is showing better strength than it showed even last year.

Q: You all have managed to grow well over 20 percent to your credit book even at a time when the economy is struggling with 7 percent credit growth. Do you see this 7 percent credit growth recovering any time soon?

A: I don’t see why the growth is 7 percent, I do believe demand for credit in this country exceeds supply. So the 7 percent growth maybe and I think the finance minister has also said it please go and see the people wanting credit, give them credit.

If you stick to your old forms of banking even the Reserve Bank of India (RBI) has said the same thing. So, I think 7 percent growth is because of my own pick on who you want to lend to. This country is a growing country.

Q: It may also be because of over-investigative culture. Even as recently as today, new rules have been written into the law that auditors have to tell you when there is a default, tell you whole host of things, we are still putting in rules to catch the thief. So wouldn’t that obviously lead to risk aversion?

A: I have a marginally different view. I think the thief must be caught. So let us not have any discussion on that. At the same time, the honest guy must not face unnecessary tension which leads to all sort of health problems.

So the way we do it is very simple. What we have done is for most of our lending, in fact, for all of our lending we have got quantitative filters.

So, we have set up quantitative models which come out whether you should lend or not at the basics and then you can add whatever you know in terms of your own intellect and then if you want to change the risk rating, any two more people have to sign to say why you need to upgrade it or downgrade it.

Give this to the Central Vigilance Commission (CVC) and say as long as they follow this basis, you can't question them on if the credit goes back later.

Q: HDFC Bank is very good for shareholders, but for a country you need infrastructure to be financed, you need to work with a lot of risks. Don’t you think that you have solved some problem and been very useful to a segment of the population but you are not the nation’s answer to the nation’s problems?

A: Very bad, being my old friend, how can you say this based on just what people are feeding you? Let me give you my view. Who has gone to lend to a small shopkeeper? ... who has gone to semi-urban and rural India? ... who is giving microfinance loans?

Q: I am not denying that.

A: You have denied it. I will come to your part also. Who has given personal loans? Who has got 25-30 percent of his portfolio in SMEs? It is a bullshit, the top corporates only account for only 28-30 percent of my portfolio. If everybody followed the same portfolio I have, we wouldn’t have one credit problem.

Q: Who will finance the irrigation projects, who will finance the power projects?

A: I do 15 percent for (irrigation and power) projects as well – only thing is you would grant me this and I want to put this on record, we are very aggressive, we are one of the most aggressive on road financing, we are the most aggressive on renewable power financing, we are quite aggressive on projects where we expect our money to come back.

But, if you want me to finance a project and say it was financed for development because we didn’t have raw material supply and now it has gone bad, I have a problem with you.

I take more risk than any of these fellows. I suggest if they took the risk then you won’t be having 7 percent and they would all be having 20 percent growth.

Q: I have great admiration for HDFC Bank but for nation building we need other institutions.

A: For nation building, I have done as much as anybody else, who substituted the money lender, who went into semi-urban and rural India.

Q: Do you see this growth increasing, do you see any green shoots that might kick start both credit growth and economic growth?

A: Yes, I see. If you take steel, power and cement structure – I think they are growing by acquisition; you could call that as good as greenshoots because they are buying so that’s greenshoot in itself.

I think the government spending in infrastructure and its increased is greenshoots in itself. Further increase that they are going to put into agriculture is greenshoot itself.

There are two types of greenshoots – public sector and private sector, one follows the other. So, there is a whole lot of desire what is coming in. Now nobody is denying the slowdown but I do believe that sequentially even industrial production is going up quarter on quarter.

I think as with the leeway the government starts to spend and the rabi and agriculture demand comes in and we do get further money into infrastructure even from outside, we will pick up. We are not going to have a hockey stick pick up but I feel every quarter the demand, the gross domestic product (GDP) will grow compared to the previous quarter.

I also feel that private investment will follow public sector investment and maybe a year-year-and-a-half away from now.

Q: The NBFC and real estate sectors have large areas of problems and I was speaking to Chris Wood of Jefferies and his point of view was that unless something extraordinary is done, they are taking into receiver ship or a bad bank – this poison will keep growth restrained. Do you think something extraordinary needs to be done until then this poison will stick?

A: There are two parts to it. First, let’s take the bank exposure. The bank exposure to real estate is not large largely because banks are stopped by RBI from funding land. NBFCs borrowed short, lent long and went into real estate.

So, there again various schemes are tried and we do need a final scheme there whether it’s a troubled asset relief program (TARP) or I think it’s in the budget.

I think if they use what is in the budget properly -- they have said we will guarantee bond issuance by NBFC.

So if they can identify the NBFCs who have projects that are saleable, that need completion and those NBFCs issue bonds which are guaranteed by the government. I think we will solve a large portion of the problem.

Q: Your point is that a bad bank or a TARP or something on those lines?

A: I don't think it is necessary, according to me no.

Q: Let me move onto an altogether different topic in the financial sector which is ownership, the RBI's ownership rules with respect to promoters. What is your comment ... it has kind of eased its demand that promoters need not bring their stake down all the way to 20 percent, they have allowed for Kotak at 26 percent ... is that a good move?

A: I presume RBI must have thought about it and thinks it is a good move.

Q: More generally what is your comment, do you think that widespread ownership is a good idea?

A: It is a good idea as long as the bank is run with integrity.

Q: But that can be – you may or may not have…

A: You know when I am not going to answer.

Q: Any suggestion at all on how ownership…

A: My suggestion is whatever there is the rule, then you stick to it or you radically change your fundamentals.

Q: Let me come to PSU banks. What is your answer to PSU banks? It is very clear to that in spite of merger they are all languishing at 2-3 percent growth and at 10 percent NPAs.

A: My point is, I think the Nayak Committee, you and others in all the interviews, you need fundamentals, they have to be run professionally, you have to give them the capability to run professionally.

Q: So less government ownership you would think is important so that you keep the CVCs -- that is what Nayak’s recommendation was.

A: I am saying yes and no. I do not think ownership is necessary. If you can ensure that the government ownership does not come with all the strings attached, it does not make any difference. But the more important point is, they have the brand, they have the distribution, and the people in the public sector banks are quite competent.

We have hired from them. So, I think if we are determined and we want to take the solution to its end stage, it can't be tinkering, you need an operation.

Q: Just one more economy or banking sector issue. The government is announcing a lot of sops for MSMEs ... RBI has also extended the restructuring period by one more year ... Mudra loans again are almost like targets are given to banks that you must give so many loans. Don't you worry that this could be the next big problem that we are ever greening the sector of loans?

A: Two parts to it, it can be a worry and it may not be a worry. If you do it properly, there is enough demand for MSME loans, I think so. Is there enough demand from MSME loans which will be repaid? I think so. If we use the target as an excuse to give a bad loan, I think you will have a problem. When I am saying excuse, I am not saying it disparagingly.

Q: RBI DGs have alerted to the quality of Mudra loans and then we go and restructure all the MSMEs.

A: Restructuring again, let us be clear, I do believe that you should never compromise on credit because then you pay double the price when the portfolio goes haywire later on.

However, if there is a problem, if the restructuring will help in making it viable -- I actually have views on the restructuring, NCLT, and all of this.

Ultimately it is very difficult here if the fellow gets into trouble to get him to revive because we have this law, that law, we have that RBI regulation.

Why can we not have something as simple as chapter 11 that here is my company, this is viable, this is what I need, this part I will keep, this part I will sell and we have the appropriate mechanism.

Q: Is that what Insolvency and Bankruptcy Code (IBC) was supposed to be?

A: IBC can't be that because there are fundamental regulations there. If a company like Kodak can say I am submitting myself to chapter 11 and his printer business was bought by Japanese company and the rest was put out for auction, I mean you are going to have something simple and rationale.

So I am not an expert in this - but I do believe it is very complicated. Little late for me to start learning this since I am not an expert.

Q: Let me speak about life here after for you ... will you concentrate on HDB Financial?

A: HDB is such a puny thing.

Q: Okay then my guess was wrong so now what is going to be the next?

A: HDB Financial, let the new guy come and decide exactly how he wants to run it. If he wants my help I would provide it for him. If he doesn’t want it doesn’t make me any difference. I got multiple options -- I am looking at global boards, I am looking at private equity, I am looking at may be changing the entire landscape in the country. So I am looking at multiple things.

Q: Changing the entire landscape in the country ... can you be a little more specific?

A: These are blue skies. But, I am looking at a lot of exciting things. My wife has made one thing very clear that I am not welcomed at home and I forgot golf, I forget beer and lunch.

Q: I got that but between then and now?

A: Between then and now what I have to make sure and this is what I want people to understand that I live a legacy here, everybody seems to be worried about what I will do and then are saying he is a very good guy, but I think they should give me some credit that I also would like a legacy and that doesn’t say that I went away.

So I want systems, I want a procedure, I want totally motivated people, I want people to understand that in a digital world it is the empowerment and the team work.

I want to leave a very strong team. If you see the 25th Anniversary speech that I gave to all our employees, what it said was they helped me able to build a great bank and based on my trips all around, they are all convinced that our best is coming now.

They have got the job and I have said look work hard, help yourself, because if you double you double.

Q: One last word to all your investors who just want to know when will this successor uncertainty end?

A: April-May

Q: April or May?

A: I don’t know that you will have to ask the search committee.

First Published:Feb 27, 2020 6:47 PM IST