HDFC Bank Ltd., India’s second-largest lender by market value, is seeking to expand in the rural market of the world’s second-most populated nation to bolster profits as competition in its cities intensifies.
Lending in India’s villages and small towns, where almost half of HDFC Bank’s branches are located, expanded as much as 40 percent in the past two years, compared with an average 25 percent increase in total loans, according to Chief Executive Officer Aditya Puri. That growth rate will change the bank’s retail lending portfolio over the next five years, he said, declining to give a target for rural loans.
Puri is betting his bank will be able to sidestep the problem of rising bad loans in rural India and boost profit from selling products to a population that exceeds the U.S. and Europe combined, after setting up procedures such as central vetting of credit. Fewer rivals offering banking services in the nation’s 600,000 villages may help HDFC Bank boost margins, the former Citigroup Inc. executive said.
“Around 70 percent of India lives there and that’s the future,” Puri said in his office in Mumbai. “The semi-urban and rural areas are almost virgin markets.”
Puri, who has set up rural branches from Kargil, bordering Pakistan, to the Andaman & Nicobar islands, near Indonesia’s Aceh province, forecasts the bank’s expansion in the past four years will help in boosting revenue to cut cost-to-income ratio, a measure of profitability, by a quarter percentage point every year through 2018.
“An improvement in the cost-to-income ratio and steady loan growth above 25 percent will be the valuation driver for the bank,” said Nitin Kumar, a Mumbai-based banking analyst at Quant Broking Ltd.
HDFC Bank’s total outstanding loans increased 24 percent in 2012 from a year earlier. India’s total bank loans, excluding advances to state agencies for food procurement, expanded 15 percent last year, data compiled by the central bank show.
Cost-to-income ratio, excluding income from bond investments, at Mumbai-based HDFC Bank was 47.1 percent for the three months ended Dec. 31, up from 46.7 percent a year earlier, Paresh Sukthankar, the bank’s executive director, said on Feb. 4.
HDFC Bank, which increased its rural loans to 15 percent of retail lending at the end of December from 9 percent in March 2011, is pricing “pockets” of increased defaults into loans in some areas, Puri, 62, said. Overall, delinquencies on rural loans are not higher than in urban markets, he said.
State Bank of India is the country’s largest rural lender, according to company exchange filings. HDFC Bank has 45 percent of its branches outside cities, according to a presentation on its website.
“The bank has seen an increase in price competition in retail in cities” in the last quarter, said Sukthankar. “Price-based competition in rural areas is lesser.”
Still, bad loans from lending to farmers may increase 5.8 percent by March, the highest among seven industries, according to a Reserve Bank of India report dated Dec. 28.
“We have tested the products over the last four years and have created a distribution network in these markets,” Puri said. “All the investments have been made and the money has to come in now.”
Shares of HDFC Bank fell 0.7 percent to 639.5 rupees at in Mumbai. The stock rose 59 percent last year, surpassing the 26 percent gain in the equity benchmark BSE India Sensitive Index.
Bad loans at Indian banks jumped to 3.6 percent as of Sept. 30 from 2.8 percent a year earlier as the economy slowed and borrowing costs remained the highest among the major Asian economies, data compiled by the central bank show. The economy will grow by 5.5 percent in the year ending March, it predicted on Jan. 29.
HDFC Bank’s bad loan ratio stood at 0.2 percent as of Dec. 31, compared with 0.76 percent at ICICI Bank Ltd., the country’s second-biggest lender by assets, according to data compiled by Bloomberg.
“We never bet the bank,” Puri said. “We started small in the rural areas four years back, learned and modified. Now it is time to reap benefits.”