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The Rediff Business Interview/ David G Eldon

'Many banks are bleeding because they cannot shrug off their excessive labour'

David G Eldon, chief executive officer of the Hongkong & Shanghai Banking Corporation Limited (aka Hongkong Bank) was in New Delhi last week to attend the India Economic Forum organised by the World Economic Forum and the Confederation of Indian Industry.

Eldon began his career with the HSBC Group in 1968, joining the British Bank of the Middle East. He was appointed chief executive officer (Malaysia) in 1988 and general manager (international) in 1992. He was made an executive director of the bank in 1994 and chief executive in 1996.

Eldon is also the non-executive chairman of the Hang Seng Bank and a director of the Hongkong Bank of Australia, besides being associated with several chambers of commerce and art and social service organisations. Mahesh Nair spoke to him.

Every foreign investor, including yourself, speaks of India as a good market. Then why is there a net outflow of FII investment this year? Why are foreign institutional investors taking their money out of India?

The obvious reason is because they are getting better returns somewhere else. Where FIIs put their money depends on whose money are they investing.

For example, if they have money from pension funds, chances are they will put it in markets which are not too risky but one that offers steady income returns. If their investor-base consists more of speculative corporates, then they will put their money in countries which offer high returns even if they are riskier.

I think it has been mostly American FIIs who have been taking their money out because they want faster returns. But to answer your question specifically, there is an outflow of FII money because there's not much good equity paper going around in India now.

What sort of paper would seduce them?

(Smiles.) Well, there're some very attractive public sector units who could come to the market! But then all that would depend on when the government is planning to divest its equity.

Is there any other reason why the Indian dream is turning sour for foreign investors?

Let me speak generally, not in the context of FII investments alone. You see, the price benefit that India offered earlier -- cheap skilled labour, low start-up costs, English-speaking population -- has now been caught up by the rest of South East Asia too.

Secondly, foreign direct investment in India scores about 20-odd per cent on implementation. This means that out of, say, 100 FDI chaps waiting in the line to invest in India, only 20-odd get to do it.

Now compare this with the rest of the emerging markets which are offering 40 per cent. All of us have been told for the past six or seven years to get ready, and then aim, aim, and aim. But nobody is firing!

Is it better in China?

Much, much better. For comparison, look at the overseas Chinese population and your own non-resident Indians. The amount of money that the Chinese diaspora pump back into their country is many times more than what India totally attracts. On the other hand, the NRIs are not pumping their money into India like their Chinese counterparts. Why? Because they can get better returns elsewhere. Ditto for the foreign investor!

So why are you here in India?

Because in spite of all its setbacks, India is a terrific place to do business. Morever, we are long-term players. If we were short-term players, like the FIIs, we would have ran somewhere else too. But HSBC is more than 100 years old in India. And we see great potential in the Indian market, especially now that financial deregulation has commenced.

But not everybody is doing well. Many foreign banks who rushed to India or decided to expand their operations enthusiastically are realising that their honeymoon is over. They are retrenching staff, closing branches and selling properties.

Yes, that's true. It is competition that is making them do this -- competition from some of the Indian banks who are sprucing their operations, the private Indian banks, and from other more lean and hungry foreign banks. But even here, in the case of many old foreign banks in India, the government needs to revamp the existing labour laws. Many banks are bleeding because they cannot shrug off their excessive labour which they need to in these days of computerisation.

There's still a long way to go in banking reforms in India, isn't there? You are still restricted by the RBI (Reserve Bank of India) in the number of branches you can open up to tap new business.

Yes, those are some of the hurdles. But there's another new development which I am not enthused about. The SEBI (Securities and Exchange Board of India) now wants everybody to announce quarterly results. It is just the kind of thing that the so-called market analysts and number-crunchers would be waiting to pounce and make their premature analysis.

But is not it a good move to usher in transparency, to let know investors and depositors how their bank is performing?

I am all for transparency, but why make the quarterly results public? Why can't the RBI have the details and see how we are doing? As for the public, I think it is more prudent to see the annual results and judge, than jump to conclusions quarterly. In banking, you cannot afford to pander to short-term interests. I fear that the pressure of quarterly disclosure will lead to just that.

What the officials in India should instead put more emphasis is on issues such as the high level of non-performing assets in the Indian banking sector.

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