Demonetisation will start showing positive results on the banks’ bottomlines in the coming years as operating costs decline, said Arun Tiwari, chairman and managing director of the public-sector Union Bank of India.
“Demonetisation is a bold step,” Mr. Tiwari, who will be retiring soon, said in an interview with The Hindu . “Most of its impact on the banking sector is going to be positive.”
The operating costs of banks would come down as banks’ customers are being forced to go digital, he said.
He pointed out that every manual cash transaction costs the banks about ₹65 (in terms of manpower used and stationery). ATMs reduced this to ₹18, and online transaction to ₹10. But, a mobile phone transaction would further cut the cost down to ₹2.
Fall in demand
He said demonetisation had “temporarily reduced” lending by banks as there was a fall in demand, mainly for personal and vehicle loans. But, he said, this was not business being lost but demand being postponed.
“On the whole, I would say demonetisation is good for the banking industry,” Mr. Tiwari said. It was also good for the entire financial services sector, though they would have to make a lot of adjustments. The non-banking financial companies (NBFCs) and micro-finance institutions would have to find ways to fit into the new less-cash economy.
He noted that in the aftermath of demonetisation bank deposits had piled up. If the economy grew at a faster pace, this would not be a problem as there would be more takers for loans. If not, the banks would have to invest the excess money in government securities.
Payments bank
Mr. Tiwari hoped the arrival of the small-finance banks and payment banks this year would add competition and hence would bring in more efficiency to the banking system. Asked about the merger of the SBI with its associate banks, Mr. Tiwari said if they increased efficiency, which he was sure of, the merger would prove to be the right decision.
He said that bad loans (non-performing assets, NPAs) and capital adequacy norms were the two major challenges of the banking industry.
The NPA volumes were large, but the rate of growth of NPAs was coming down. A large number of infrastructure companies were operating far below their capacities and hence were not able to repay their loans.
Two-thirds of the Union Bank of India’s NPAs came from four infrastructure sectors — steel, power, roads and ports. If the economy grew faster and the infrastructure sector looked up, the NPAs would naturally shrink. He said the UBI would continue to focus on lending to RAM (retail, agriculture and MMSEs).
