Competition can intensify and banks will become more efficient
Indian banking sector, which is dominated by state-controlled banks, has been facing formidable challenges. Hefty increases in interest rates by the central bank to batten down stubborn inflation has dented economic growth and contributed to rising bad loans.
After 13 rate increases since April 2010, the Reserve Bank of India (RBI) halted the tightening cycle and signalled in December that its next move would be a reduction in interest rates. It has since slashed the cash reserve ratio (CRR) by 125 basis points, releasing around Rs.80,000 crore in to the banking system, but is yet to cut interest rates.
The RBI is set to review the monetary policy on April 17 and banks, industry representatives and government officials have all submitted their wish list for a rate reduction to help revive growth.
In an interview to Oommen A. Ninan, Chairman and Managing Director of Bank of Baroda (BoB), and Chairman of Indian Banks' Association, M. D. Mallya, says he is keeping his fingers crossed on the rates decision. The state-run bank gets a quarter of its business from international operations, which are growing at about 30-35 per cent. Excerpts.
The RBI has said the tightening cycle is over but there are already concerns about inflation again picking up. When do you think the rates would start falling?
The RBI has been consistent in articulating its stand that it would like to anchor inflationary pressures while, at the same time, not compromising on the growth aspects.
One relevant thing which, perhaps, bothers the RBI is the crude oil prices that remain quite high and could impact overall inflationary pressures. So, it is difficult for me to say what would be the timing as far as the reduction in policy rates is concerned. But, as the RBI has clearly mentioned, one could look with optimism for a moderation in rates. But the timing we leave it to the RBI.
What sort of credit and deposit growth are you expecting in the new fiscal year? What would be the key drivers?
I would like to wait for the RBI's policy. That would give direction. My whole budget will depend on that.
You received about Rs.1,644 crore through issue of shares on a preferential basis to LIC at the end of March. How much would this help to improve your capital adequacy ratio? How much more do you need?
We're well capitalised. With this infusion of LIC funds our capital adequacy ratio is in excess of 14.5 per cent as against the required 9 per cent. Our Tier-I capital will be much above 10.5-11 per cent, which is again strong. The whole idea is to maintain a healthy capital adequacy ratio.
What are your plans for expansion? Any foreign forays?
Twenty-five per cent of our business comes from international operations. It has been a steady growth at about 30-35 per cent as far as international business or international profits are concerned. It's been a major contributor to overall growth in income and profit of the bank.
We have been growing quite strongly in terms of branch network. At the moment, we have about 90 branches and offices across the globe.
We would endeavour to increase it to 100, may be in the next 7-8 months. We take Indian bank flavour to the international customers.
The advance tax paid by your bank seems to indicate flat profits. What problems are weighing you down?
If you take the overall profit for the full year, there has been a significant growth over last year. So, the fourth quarter advance tax paid by Bank of Baroda ultimately keeps in mind the overall requirement of the tax that needs to be paid. We have been consistent as far as our growth in profit numbers is concerned.
BoB raised short-term deposit rates by 0.25 percentage points this week. Wouldn't this put pressure on your margins?
It is in line with the market conditions. We continue to be competitive in offering rates. We are also managing the overall portfolio by focusing on our CASA (Current Account, Savings Account) growth. So, our cost-to-deposit is well under control.
Overall margins have been under pressure as far as the banking system is concerned.
As for liability side, we are trying to bring down the cost of raising resources. Margins of Bank of Baroda are strong and a margin of 3.4 per cent is significant.
According to rating agencies, the biggest risk for banks in India is bad loans, especially against sectors such as power, airlines and telecom. How big is this issue and what is BoBs position?
It's a fact that the overall portfolio has been under strain of late primarily on account of economic delinquencies. But if you look at the overall fresh incremental slippages or the overall position of profits and NPAs in the banking system, it is well within the manageable situation.
Therefore, Indian banking system, to my mind, is quite resilient to absorb or manage the incremental delinquencies. It is a challenge: some could be made viable in the course of time.
This is a cycle we have seen in the past and we can move forward with optimism.
Bank of Baroda's asset portfolio has been robust. Our incremental slippages have been contained to almost about 1.15 per cent of total advances. So, we are comfortably placed in managing our asset portfolio.
Regarding the sectors you mentioned, it must be noted that not all accounts in these sectors are bad. For Bank of Baroda, some of these stress sectors are reasonably good and we don't foresee any crisis.
With many large borrowers in trouble, is there a rethinking on loan portfolios? Would you be stepping up loans to retail consumers?
All the areas which have a potential are target areas. By and large, in the case of our bank, it is equitably distributed among various portfolios. Our focus on encashing opportunities which are available in any segment would continue. There may not be any major shift as far as the overall policy is concerned.
What changes do you see happening to the banking sector, in general, and to BoB, in particular?
Primarily, competition can intensify and banks will become more efficient. The transaction cost of customers could come down and a bank which is efficient, nimble and customer focussed would always be able to do better than others.
Keeping this in mind, we have been focusing on our customer initiatives — IT capabilities and manpower capabilities. We would like to be known as a bank which has respect to customers and a bank which is customer-friendly and a bank which innovates keeping the customer in mind.
If normal credit growth is not picking up as expected, what are the fall-back options to boost earnings and fee incomes?
We are yet to really study the current year potentials because one has to wait for the RBI's annual policy. One would be able to assess the situation only after that. Fee income is an area of focus of the bank. We have been growing at 25-30 per cent as far as fee income is concerned. That focus will continue without any change.