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Updated: August 6, 2012 01:06 IST

Not good to be too risk averse

    N. Ravi Kumar
    K. T. Jagannathan
Comment (7)   ·   print   ·   T  T  
M. Narendra: “Need to improve last mile reach”. File photo
The Hindu
M. Narendra: “Need to improve last mile reach”. File photo

Indian banking sector is very much capable of withstanding the difficulties

He has a deceptive frame. When he opens up, however, thoughts flow ever so freely. As a banker, he is willing to stick his neck out to take a few risks. In this hour-long interaction with The Hindu, M. Narendra, Chairman and Managing Director, Indian Overseas Bank, puts enormous faith in the Indian banking system. Excerpts:

What is the banking scene like at the moment?

It is reasonably challenging, and offers several growth opportunities. Retail credit is one area where every bank is taking more diversified risks. In our case, we are looking at increasing our penetration in semi-urban and rural centres.

Agricultural credit is another portfolio which has assumed more significance from the perspective of helping farmers, who are staring at the failure of monsoon. While Tamil Nadu and Andhra Pradesh have not been affected, States such as Maharashtra, Karnataka and Gujarat have been affected by drought. One component of the plan is to supplement the income of such farmers… you need to give help to pursue other activities such as poultry, fishery, dairy farming and sheep-rearing.

Another focus area is the service sector professionals. We are looking at the salaried segment, middle-income group and even individuals with high net worth. They don’t face difficulty in servicing loans though their savings are limited.

What are the challenges facing the banking industry at the moment?

They are in the form of sectoral difficulties. These, in turn, are either due to global or domestic factors, inflation-related or because insufficient liquidity. Non-availability of natural resources such as coal, limitations of the government to provide fiscal sops, increase spending in view of concerns related to fiscal deficit, restrictions in terms opening up of some sectors — various factors can affect the financial sector.

Infrastructure projects can do a lot of good, and need to be pushed. It will lead to core sector growth… be it steel or cement. Real estate sector also needs to be a little buoyant. If there are people who do not want to bring down the price, demand may be less! Globally, investors are for more reforms, especially in insurance, retail and aviation sectors.

In the financial sector, there is a variation between the credit growth and resource growth. Since inflation is high now, a lot of money is being put in physical assets such as gold and real estate as a hedge. Physical assets have to be converted into financial assets. A key challenge for us is to reach out to pockets where there is surplus money through the current banking channel. There is need to improve last mile reach.

Where does interest rate figure in such a scenario?

If new capital expenditure is not coming, it is not merely related to interest rates. If your operating income is less, then you will look at interest to see if it is high. But if the operating income is higher, then interest cost is affordable. It is not interest alone. Fair levels of cash accruals are needed. We do have many corporate entities with good cash reserves, and looking for good acquisition, both within the country and abroad. They are waiting for the right time and valuation. While doing so, proper planning is the key. For, there are also those who have gone for all types of expansion, some core activity and some non-core activity. A jerk in the business cycle gets them affected.

What will be the impact of the cut in SLR (statutory liquidity rate) by the Reserve Bank?

To that extent, your ability to borrow money from the RBI to fund your productive sector is increased. In view of the proactive steps taken by RBI, it is necessary that we also should give benefits to some of the productive sectors. It will help the banks reduce the cost of funds. If your lending growth rate is 17 per cent, then your deposit growth rate need not be 25 per cent. Why should you unnecessarily add to your costs? When money is coming into the system, I can supplement it from RBI. Why not reduce the deposit rate? There will be an opportunity to reduce the rate of interest on housing, vehicle, personal segment and trade loans.

Do you have any special schemes for farmers?

We [all the public sector banks], based on a government guideline, are in the process of introducing a comprehensive smart card that will make the process of accessing agricultural credit hassle-free for farmers. IOB also recently undertook a campaign for investment credit. This would enable farmers to improve productivity and efficiency of operation. It will also bring more agriculture land into farming. This month and in September, we are likely to do Rs.1,000 crore to Rs.1,500 crore fresh disbursements of crop loan.

What is being done in terms of financial inclusion?

Every village covered under financial inclusion has now to be covered under investment credit. This is a part of the capacity-building measure. In addition, all these people have to be given five products, now the focus is on that. Following the appeal of Chief Minister [Jayalalithaa] to make Tamil Nadu a model state in terms of financial inclusion, a meeting of bankers was held, and it was decided to start the work to cover around 6,000 villages. We also see a major role for us in the decision to introduce electronic payment, using Aadhar cards, of the benefits under both the Central and State level welfare schemes. The challenges would be in ensuring that our Business Correspondents are capable of implementing the project, the rush does not come to our branch in such a way that our normal business gets affected.

Will banks increasingly play the role of a facilitator too?

There is lot of opportunity in capturing the money when it has to be passed on to the beneficiary electronically. It gives you a lot of access to government float funds. A transaction fee may also come, and you are getting a good customer.

Do you see this as a new segment?

Six lakh villages are a large number, and we have covered 73,000. When seen against the population of the country, all the accounts of the banking industry is very limited. Even in urban area, there are so many people who do not have bank account. They earn, but the cash never gets into the banking system. It has to be done.

Which are the sectors that show more promise in terms of credit offtake?

Road projects, particularly where the toll collection will be fairly good, and the service sectors such as hospitality, hospital, educational institutions – they will all be in the list.

Is the Indian banking system efficient, better?

We are much better thanks to the initiatives taken by the government and RBI. During the boom period, we were not so luxurious to shell out everything, there is enough counter-cyclical buffer. RBI is again thinking of dynamic provisioning, and in terms of capital adequacy, we are moving from Basel II to Basel III. In all these areas, the supervision, control, plus the self-made regulation, and the financial discipline are all much better. Indian banking sector is much capable of withstanding the difficulties. And, the Indian people are also capable of paying.

As a banker, what would be your advice to yourself?

We need to be really in communication with the customers. We must be able to know them well, provide them solutions, and, at the same time, not pressed in terms of NPA. The need is for a balanced approach, keeping in mind financial strength of the bank and contribution to the economic growth. As a banker, my advice to myself is be alert, active, and be positive. Being positive is very important. Too much risk aversion is also not good.

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Rather than reducing rates on deposits, bankers should improve their credit
appraisal skills, reduce NPAs, and economize in their expenditures. They should
know to operate with less margins. In the face of inflation and bank interest being
subjected to tax, bank deposits are becoming less attractive for depositors. Net of
inflation, interest rate is quite low. We cannot compare our deposit rates with the
rates prevailing in advanced countries where the inflation rates are pretty low.

from:  Dr. K. U. Mada
Posted on: Aug 6, 2012 at 21:57 IST

When the inflation is high, reducing deposit rate means hitting the depositors who
are the base of the banking system. It is tantamount to double hit. Bankers should
learn the art of operating with thinner and thinner margins with better standards of
credit appraisals and greater economy in expenditure. Or else the bank interest
should be exempt from tax which the fisc may not permit. With lower inflation,
deposit rates could come down. The fixation of deposit rate should be considered
taking into account inflation and taxation.

from:  Dr. K. U. Mada
Posted on: Aug 6, 2012 at 19:15 IST

None could deny that bankers have to take "risk". What is essential is that they
should be knowledgeable enough in the type of risk they are taking and the
borrower on whom they do so. In credit appraisal, knowledge apart, wisdom
should reign. Often the background of the borrower is not paid adequate
consideration. When the banks are flushed with funds they adopt a more lenient
approach which results in more mistakes. Studied risk-taking is what is expected
of a bank. In consortium lending just because one bank is taking a decision
another simply follows. Each bank should make its own study and decide its
course of action. If debt default takes place in such case bankers could then move
forward with balanced ease. Right at the appraisal stage the lenders should be so
knowledgeable about the affairs of the borrower that they should be able to
dissuade him not to invest and with right arguments. No use taking risk just as a
matter of risk as understood in ordinary parlance.

from:  Dr. K. U. Mada
Posted on: Aug 6, 2012 at 18:57 IST

He is the pre-cursor for the financial meltdown that is going to happen in 2016-17.

Ask him to disclose his income break up and the bonus criterion partt and also ask him if there is a loss does he pays back the amount of bonus earned last year. If the bank fails will he go to govt for getting tax payers money or bail it out from personal savings before the fall and you will know his dark side as well

from:  rajul.mishra
Posted on: Aug 6, 2012 at 17:20 IST

The south based popular bank Indian overseas Bank requires some self introspection in its working.1. The bank is ill advised by the Top Management that more business means more profit. The more expansion of their credit portfolios has resulted in more NPAs than profit.2. The lack of skilled man power will be a real danger by holding larger inventories without godowns. The top management is only counting their days for retirement due to aging .The management should be informed about their weakness by an external agencies and try to follow the strategies of CITI , HDFC BANKS to show profit.

from:  VSBALASUBRAMANIAN
Posted on: Aug 6, 2012 at 12:15 IST

Excellent.He is a great expert who presents such complex contents in
simple terms so that everyone could able to understand.usually it is
very uncommon.It requires in depth knowledge in the field.
He deserves for appreciation from one and all.
Thanks,

from:  Muthu
Posted on: Aug 6, 2012 at 11:23 IST

One new factor to be reckoned is growing number of seniors in our country who wish to invest in safe Bank and derive benefits better than other modes. But one has noticed that even there, succession problems are faced in event of the depositor demise; lot tedious formalities need to be completed which makes it difficult for the children settled abroad to comply with. Suggest that this be made easy, by clear statement by Bank that Nominee with relationship and photo/signature identity taken would be honoured without putting the wards into difficulty. New rules need to be made and kept in order to facilitate more flow of such deposits; Yes, the resultant income in banks of NRI/NRO would be subject to tax as per Govt rules, okay; but succession made easy for the Bank and the client - Any one willing to respond and offer suggestions?

from:  Radhik Hairam
Posted on: Aug 6, 2012 at 03:11 IST
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