Deepak Parekh exclusive interview | HDFC and HDFC Bank need to have a common culture

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Edited excerpts:

We have to merge the culture and all our people are going to be in the bank. So, some rubbing off of the culture will happen. Now, we will have to have a common culture. Now, bank will have to deal in housing loans which is very emotional, personal, family — all these are there. So we have to be very careful with all our customers.

Now, if you give a personal loan to someone who speculates and loses, we have to be tough on them. Therefore, the feeling goes as the bank culture is not good. If I take a car loan and he runs away with the car, we have to repossess. So, the business of bank and the business of mortgage finance has different sentimental and emotional issue. The bank has to be tougher.

We had to have a larger base of resources with our growth. Indian debt market is not developed yet. For NBFCs to raise large sums of money is not easy and financial sector, home finance, home demand is increasing by leaps and bounds. So, we also have to be careful that we will be able to raise the resources we need for disbursements five years from now. See, today we are very comfortable, tomorrow we will be very comfortable, two years later we are very comfortable but what about the future as the business keeps growing? Housing demand is not going to stop in India for next 50 years.

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The constraint is that the RBI, over the last few years, removed the arbitrage between a bank and an NBFC; indirectly removed by coming out with NPA (non-performing assets) classification the same as the bank, higher capital adequacy for us. There is higher weightage on housing loans.

They have come out with a paper very clearly saying large NBFCs must become banks. Then they are coming with three layers of regulatory requirements for NBFCs — upper layer, middle layer, lower layer. Anyone above Rs50000 crore asset base will be upper layer; we are five lakh crore rupees. We are the highest in the upper layer. And they have very clearly said that the upper layer NBFCs will be monitored, inspected, regulated akin to a bank. So all these regulations…NPAs is the worst. I tell you. If a person is four months in arrears and he pays two months instalment, under NHB (National Housing Bank) we took him out of NPA, because he is below 90 days. Under banking regulation, if he is four months arrear and if he pays 3 months, he is still an NPA. We have assets as security. But still RBI brought these regulations. So the RBI is going to regulate big NBFCs like the banks.

The big blow was LCR, Liquidity coverage ratio. So technically, 30-days outstanding, whether it is deposit maturity, whether it is loan repayment, bond repayment—all of that should be kept in a separate bank account. So technically, that increases the cost significantly. So the main motivation of the regulatory changes was that it was very clear that the RBI is concerned about large NBFCs after IL&FS and others. The RBI wants regulation of (large NBFCs) similar to banks.

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But, why have they done it? Because of bad experiences. Because of some black sheeps in the family. There are so many NBFCs that have run down. They take retail and deposits and they don’t pay. As the regulator, you are responsible to the Parliament. There are huge questions asked on how IL&FS collapsed, how Srei Finane collapsed, how Dewan Housing Collapased, what Indiabulls is going through..the number of these small companies…so the regulations need to be tighter and it is not just the RBI, it is all over the world.

Not unavoidable. We could have still worked. But there are a number of reasons. Among the number of reasons, this is one of the reasons.