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, 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.

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 Benku 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 element 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 ease 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 caring 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.