Face to Face with C. A. Sarathchandra - Chief Executive of HDFC Bank
Picture credit: Google
By Dr. Tilak S. Fernando (2006)
Mr.
C.A.Sarathchandra is a banker with bags of experience in Commercial Development
and Investment, backed by his professional qualifications in Banking,
Accounting, Management, Marketing, and Economic Development.
Commencing
his career in Sri Lanka, after returning from the UK, Mr. Sarathchandra worked
at the Merchant Bank as Manager, Consultant, and Assistant Director and as the
Executive Director in charge of Finance and Management Information systems in
the Peoples Bank.
Moving
from there to Seylan Merchant Bank, as its Chief Executive Officer and
Executive Director (Finance), he dealt extensively in the capital market
operation. Presently as the Chief Executive Officer of the HDFC Bank he has
successfully transformed the Old Housing Development Finance Corporation into a
Licensed Specialized Bank in 2003. Under his Management HDFC Bank won the National
Business Excellence Award presented by the Sri Lanka National Chamber of
Commerce, in the financial services sector, on two consecutive occasions in
2004 and 2005. Mr. Sarathchandra has been recently appointed by the World Bank
as a consultant for the South Asia Region for an Assignment of Housing Finance
Industry. He has authored four books titled
Viyaparika
Obata Banku Naya (Bank Loans for entrepreneurs), Concepts of Marketing, Share
Market - Colombo and Profitable Investing in Shares, which was launched very
recently. In an interview with Dr. Tilak S. Fernando, Mr. C.A. Sarathchandra
spoke about the activities of HDFC Bank and its future role. Excerpts of the
interview:
Q. What do you think about the Sri Lankan Housing finance Industry?
A. Home ownership
in Sri Lanka has always been high compared to international standards.
Q. Can you elaborate on that?
A. Yes,
The rate of increase in house prices in the past two to three years have been
extremely large by historical standards. As a consequence home ownership has
been a great investment for the average Sri Lankan, so good in fact, that many
ordinary people have become millionaires through no great effort of their own.
Using the equity in their existing home many have made additional investments in
housing both for rental and capital gains. Multi dwelling owning families, in
the upper middle and wider income groups, are quite common. Holiday Houses and
the extensive upgrading of old homes have been significant investments, which
have paid dividend spades. The Sri Lankan housing finance market has
experienced a long and sustained “bull
run" for over three years to the extent that professional concerns
have been expressed that an unsustainable bubble exists. There is concern about
the rapid growth in household borrowing that it is unsustainable and that an
inevitable correction will cause major headaches for individuals, financiers
and indeed the economy generally.
The
flipside of existing owners enjoying the benefits of capital appreciation and
being speculators making dramatic gains in the high raise home unit market is
the fact that home ownership is rapidly, if not already, beyond the means of
many young couples in low and middle income groups who in the past would have
become owners.
Q . In developed countries, such as in the UK, when young couples in low and
middle income groups go for a mortgage loan to buy a home, Banks and building
societies adopt a system whereby such first time borrowers pay only the portion
for a fixed period thereby repayment of the loan is kept to a minimum giving
the borrowers a window of an opportunity to make the repayment of the loan
comfortably within their means. Why do you think that Banks in Sri Lanka have
not thought about such a system to overcome problems such as mentioned above?
A. It is
possible for us to adopt this loan scheme. However there would not be any
benefit to borrowers as the rates of interest in Sir Lanka is quite high. When
compared to those in Europe, and as such, interest accumulated during grace
period would be very high and may find difficult to pay.
Q. What are your views on the political consequences on the housing finance
market?
A. The
political consequences of the past have not been missed by the incumbent
government. It has announced that the Government will inquire into the
affordability and availability of housing for families and individuals. The
inquiry will identify mechanisms to improve the ability of households,
especially middle income households, to access a home ownership. The Government
has already started credit schemes through banks for government servants at
affordable interest rates by providing interest subsidies by the government to
lending banks.
Q. Do you have any statistical data to
illustrate how the rising incomes, low interest rates and high inflation rates
have played in the past?
A.
Undoubtedly the period of rising incomes, low interest rates, and high
inflation rates over the past three years has contributed to a bullish housing
market as follows:
Year
Fixed Deposit Interest
Inflation
% Per capital income (US$)
2000
15.00
14.00
899
2001
13.00
14.50
841
2002
10.00
10.50
870
2003
7.00
6.90
948
2004
8.00
13.80
1,031
2005
6.95
11.60
NA
2006
(July)
9.82
15.30
NA
The rate
of innovation in housing lending products coupled with greater competitions has
contributed much to demand, as has eased of borrowing. However, still the major
commercial banks and the National Savings bank and the SMIB and HDFC bank remain
the volume players in housing finance.
Just how
the Sri Lanka housing bubble will burst remains to be seen, but prudentially
supervised institutions are managed to handle any correction. Certainly our own
bank has maintained its standards, and despite any correction, is well placed
to go forward.
Q. What would be the strategy to meet the new entrants coming into the
system?
A. We have
invested heavily in technology so as to provide our customers with a superior
technologically backed service. Our branches are linked to a common computer
network and provide on-line services to customers.
We are
also focusing strongly on staff training to enable a competent and efficient
service to be provided to our customers.
Our
ancillary services, such as legal, valuation, and technical also facilitate our
customers while enabling us to enjoy an edge over the competitors.
We feel
that all these, backed by the financial resources to implement these
strategies, we would be in a position to withstand the competition successfully
from the new entrants.
Q. How do you propose to maintain your market leadership in housing finance
in low and middle-income sector?
A. We
propose not only to maintain our existing market leadership in low and
middle-income sector but also wish to expand our volumes in the wider income
sector. In this regard we would be offering a much caring service to our
prospective customers taking into consideration their individual needs and
endeavouring to satisfy their requirements in housing finance. Apart from
maintaining a high level of service, we will be offering competitive rates of
interest and other concessions to attract new customers. We also intend to
establish 10 more extension offices attached to existing main branches to
provide a better customer care service and enhance our loan portfolio further.
Q. Why do you think Sri Lankan banks predominantly rely on deposits and
equity capital and not on loan and debt instruments for funding purposes?
A.
The reasons for this are mainly historical. Banks have predominantly
relied on customer deposits to meet their funding requirements mainly because
of its ready availability, low cost and relatively less competition for such
deposits. Further, equity capital too is relatively cheap. Another reason why
long term debt instruments are not popular is due to virtual lack of a
long-term debt market and the reluctance shown by investors in making long-term
commitments. Therefore, for long term debt instruments to be successful, it
will be important to have a primary and an active secondary market together
with a reliable mechanism for pricing of such long term debt.
However,
HDFC Bank has been able to raise long-term funds by issuing innovative
long-term debt instruments. One such instrument issued by HDFC Bank is the
mortgaged backed securitization, which we did for the first time in Sri Lanka,
managed by Citi Group and the Deutsche Bank acting as Trustees. Long-term funds
are inevitable for our bank, as otherwise loan portfolio will be exposed to
maturity mismatching.
The
Development of the capital market ensures, at least, partly as the solution to
capital inadequacy of the financial market in the country. The capital market
also enables the corporate institutions to raise funds in correct tenure, form,
and cost. However, the development of capital market requires fiscal incentives
such as stamp duty waiver, tax exemptions, and introduction of necessary
infrastructure such as a conducive legal system and an institutional system.
Q. Would you like to comment on your loan portfolio?
A.
Certainly. HDFC Bank's loan portfolio was rated A (Sri) by Fitch Lanka
in 2004, but it was upgraded to AA - in 2005. This shows the quality of
our loan portfolio.
Q. What can you say about the financial standing of the Bank in brief?
A. For
the first seven months up to July 2006 we have made a net profit after tax of
Rs. 123.66 million, which is in excess of the profit after tax in 2005 of
Rs.116.7 million. As at July end 2006, for the seven-month period, we have
granted 7468 loans to the value of Rs.1887 million compared to 7276 loans
granted to the value of Rs.1923 in the whole year 2005.
The net
asset value per share capital of HDFC Bank, which was Rs.170/- in 2002,
achieved remarkable growth, climbing to Rs.214/- in 2003, Rs.245 in 2004, and
Rs. 268 in 2005 and to Rs.278 in June 2006 as per half-year accounts
Our net
value has spiraled because of our high degree of professionalism and financial
prudence. This clearly manifests the financial strength of the Bank, which is
among the top 20 State Institutions in Sri Lanka.
Q How do you see the future prospects of the HDFC Bank?
A. We have
several strategies in our future plan including new initiatives by HDFC to
housing finance market. The Housing in today's context is expensive, sometimes
artificially so, and, therefore, it is our responsibility at HDFC Bank to bring
some semblance of balance to the market. This prompted us not only to finance
housing but also to go into construction through a separate subsidiary, so that
our customers can get total solution under one roof at a reasonable price.
In raising
funds to finance our operations, our aim is to infuse contemporary
methodologies and best practices prevalent in other parts of the world, so that
all the needs of borrowers are looked after in a most effective manner. One
such innovative initiative we had in the recent past was raising long-term
funds through mortgage-backed securitization.
The
strategic approach adopted by HDFC Bank catering to numerous market segments
with complementing products, applying market mixes to suit the relevant
segments, infusing internal control measures to minimise credit and market
risks and creating and enabling environment for the entire team of staff to
function productively and contentedly as being the winning formula for the
continuing success. We work on that philosophy and our notable success in both
numbers and recognition through awards show that we on the right path.
Daily News - 2006