We're making a tectonic shift from wholesale to retail banking: Arun Kaul

Interview with CMD, UCO Bank

UCO Bank has seen sharp rise in its net profit in the last couple of quarters after years of slow earnings growth and deteriorating asset quality. Arun Kaul, chairman and managing director of UCO Bank, believes his strategy to switch to low-cost deposits and de-risk the bank's loan portfolio is now paying dividends. In an interview with Somasroy Chakraborty, Kaul says the bank is now transforming itself from a wholesale bank into a retail lender. Edited excerpts:

 

UCO Bank's net profit growth has accelerated in recent quarters after years of slow growth. What has contributed to this turnaround?

 

If you look at UCO Bank's history, during the 80s the bank made very small profit. The bank was incurring losses throughout the decade of 90s. A strategic revival plan drawn up in 1997 to turn the tide envisaged among other things increasing the size of the balance sheet substantially. Consequently, during the first decade of 21st century, the bank followed a business model based on bulk lending supported by bulk deposits. From 2010, since the economy was not doing well, large corporate credit came under stress and NPAs (non-performing assets) shot up. It impacted the bank's profitability.

With a view to de-risk the business as also improve profitability, the bank embarked upon changing the mix of both its assets and liabilities. Our business model shifted from bulk to retail. The improvement in our profitability in the last couple of quarters is primarily because of the growth in low-cost CASA (current account savings account) deposits and rebalancing of our asset portfolio. Three years back the share of CASA deposits (in total deposits) had declined to 21%, but now it is around 35%. This has helped us in reducing the cost of funds. On the asset side, our loans were skewed heavily in favour of large corporates and the infrastructure sector.

Since there was stress on these segments, we decided to move away from large corporate credit to retail, SME and agricultural advances. We have reduced the share of large corporate credit and infrastructure finance from above 70% of our loan portfolio to below 50%. With rebalancing of our portfolio we do not anticipate large slippages in the future. All these measures have helped us in improving our bottom-line. In the last two quarters, our operating profit growth has been among the highest in the banking industry, while net profit growth has also been significant.

 

How did you manage to grow your CASA deposit base?

 

The reasons are multifarious. We are now opening new branches. For a very long time we did not open many branches. Between 1985 and 2010, we opened around 430 branches. Since my joining, revitalising the branches was given top priority. In the last three years, we have opened more than 600 branches. What we did not do in 25 years, we have done much more than that during the last three years. We have ambitious plans to open more branches, especially in unbanked areas. We are also acquiring a lot of customers. Currently, we are acquiring 250,000 customers a month, or three million new customers a year. In the ten years, from 2001 to 2010, our customer acquisition was less than three million. These initiatives are helping us to push up the CASA and core deposit growth. We are also focusing on customer centricity and servicing, and leveraging on technology in a big way to ensure customer comfort and convenience. We are training our staff, making innovative product designing and introducing a number of retail products – both on the asset as well as on the liability side keeping in mind what the customer really wants. We are making a tectonic shift from wholesale banking to retail banking.

 

How many branches you plan to open in the next 24 months? Also, how do you plan to cap the rise in operating expenses?

 

We have more than 2,700 branches now. By the end of March, 2014 we will have close to 2,900 branches. In 2014-15, we plan to add another 200-300 branches. We have realised that nowadays you don't require large space in branches as the customer footfalls are declining because of increasing use of alternative delivery channels, which we are strengthening. We have started re-organising and reducing space even in our existing branches. There is a substantial savings that we are making by reducing branch sizes. At the same time we are focusing on improving the ambience of our branches to ensure customer delight. We are also leveraging on technology to engage with our customers.

 

Do you think that the worst in terms of NPA addition is behind you?

 

If the economy is under stress, then there will always be pressure on large corporate credit. Hence, we are trying to de-risk our portfolio by shifting away from large corporate loans to small advances. The risk is much lower in small ticket loans. We are also focusing on safe businesses like bill discounting and letter of credit. For the last four quarters, our gross NPA ratio has been around 5.3%. We expect it to come down significantly. Our restructured loan portfolio is around Rs 11,000 crore. Almost 50% of the restructured book comprises of loans to discoms. The issues there are now getting resolved. We don't see a large pipeline of restructured assets and strongly believe that the concerns on that front are over. We also expect our provisions to come down.

 

Do you expect the bank's credit growth to decelerate as the focus is now on small ticket loans?

 

We are not looking at a very large credit growth. We are comfortable with a growth of 14-15%, which is also in line with the Reserve Bank of India's (RBI) expectations. We are aware that in the current environment we cannot afford aggressive growth in credit. Then the risks will also rise. We are very careful in choosing our borrowers.

 

What will be your deposit growth target?

 

It will be in the range of 15-16% despite the reduction in our bulk deposits. Our core deposits have been growing at 40-45%. The share of bulk deposits has come down below 10% now. The good news is we are growing our deposits but not our cost of funds.

 

Despite RBI increasing its policy repo rate, state-run lenders, including UCO Bank, have not hiked their lending rates. Why?

 

As a banker, I will increase my lending rate only when my cost of deposit goes up. As far as UCO Bank is concerned, we have been able to reduce our cost of deposits. This is because of the increase in share of CASA deposits. Our cost of deposit was 6.11% at the end of September, 2013 compared to 7.58% a year earlier. Since there is no cost pressure, there is no urgency to increase our lending rate.

 

Do you expect RBI to raise repo rate again in December?

 

Today, there is ample liquidity in the system. One of the main reasons for that is FCNR (B) deposit flows, which brought in almost $34 billion. We also raised $684 million FCNR (B) through the RBI window. There is fairly large liquidity in the system today. We have a view that if liquidity continues to be ample, the interest rate will come down. RBI's credit policy is largely directed by inflationary expectations. We expect the winter crops to be good because of the good monsoon. We have already seen onion prices coming down and expect vegetable prices to fall further after December. I will like to wait and see what happens in RBI's credit policy in December. But clearly, my view is inflationary pressures will come down going forward and the central bank will take appropriate steps.

 

Is there a scope to further improve your net interest margin?

 

Our net interest margin has expanded because of the growth in CASA deposits and slight improvement in yields on advances. Also, the increased focus on recovery from NPAs adds to our income and we have been able to control our expenses. We expect our domestic net interest margin to remain over 3% in coming quarters.

 

What contributed to the growth in your treasury earnings in the first half of 2013-14?

 

In April, 2013 we noticed that the current account deficit was very high. We anticipated volatility on the currency front, on liquidity and interest rates. At that time, the yields were coming down and it even went below 8%. Banks were aggressively purchasing government securities. But we decided to stay away. We started selling and booking profits. We made large trading profits in April, May and June. We did not purchase much as we felt it was not the right time. We preferred to stay liquid, sell and book profit. So, when the crisis came in July, we had strong liquidity.

 

UCO Bank has been a beneficiary of the Western sanctions against Iran. If the sanctions are lifted will it affect your revenues?

 

There is a misunderstanding in the market. The withdrawal of sanctions on Iran is going to help the bank more. India was under pressure from USA to reduce oil imports from Iran. That pressure goes off and we can maintain our oil imports as much as last year. If India imports more oil from Iran, more money will come through our bank, and we will benefit. Also, currently there are lot of restrictions on exports to Iran. If those restrictions are lifted we will benefit more. For instance, Indian exports (that are allowed) to Iran has seen a good growth in the last one year. In April-June, 2012 the average export payments made through UCO Bank was $40 million a month. This year, in the same period, the average export payment made through us was $400 million a month. If the restrictions are lifted, and more products are allowed to be exported, it will mean good business for us. Also, once the sanctions are diluted India may import other products like fertilizers from Iran, apart from oil. So, there is good business opportunity for us.

 

Do you have plans to deepen your overseas presence?

 

We have two branches each in Hong Kong and Singapore. As already explained we have been focusing on our domestic operations and cleaning our balance sheet. The conditions are very tough overseas and the business you get there is relatively small. We have no plans to expand our presence abroad at this point of time.

 

Do you plan to raise capital in the near-term?

 

The government has promised to give us Rs 200 crore. We are comfortable with our capital adequacy ratio. It was 13.23% at the end of September, 2013. Also, the assets that we are building are of low risks and do not require much capital. So, we have no plans to raise fresh capital at least in the near future.