Having decided to raise Rs 200 crore through tier II bonds, Kolkata-based United Bank of India, recently submitted to the Union government a roadmap for capital requirement of over the next five years. Bhaskar Sen, chairman and managing director, UBI, in an interview with Namrata Acharya, explains how changes in the macro economic situation will impact the banking industry. Edited excerpts
How equipped are Indian banks to face challenges arising from global macro economic conditions?
It depends on the portfolio quality as well as risk management strategies of individual banks. As far as we are concerned, we have limited exposures to international trade. Further, we do not have any significant individual exposure in foreign currency loans. Whatever exposures we have, we monitor them regularly and as of now, we have nothing much to worry about.
What specific impact of Rupee depreciation you see in the banking sector?
In our case, all our borrowings in foreign currency are totally hedged. Coming to our loan book, all our foreign currency loans are either fully hedged or there are natural hedges in the form of foreign currency receivables. Therefore, although Rupee has depreciated significantly during past couple of months, we don't see any adverse impact in our Balance Sheet.
Compared to the economic slowdown in 2008 are banks in a better or worse position to face a crisis?
If you recall, in 2008 banks were required to face two basic problems, ie, tight liquidity conditions and volatile interest rate scenario which in turn, affected the quality of the loan portfolio. Downgrades in asset quality were preempted by massive restructuring of loans. This time, banks are well prepared to overcome challenges on the liquidity front. In case of interest rates, although there have been persistent hikes, the hikes were gradual and banks are not required to face volatile conditions. And therefore, this time banks have enough rooms to strategise and decide on the size and duration of both assets and liabilities. However, the major challenge this time would be on managing the asset quality particularly the loans which were restructured once in 2008, as second restructuring of these loans would instantly make them NPA as per existing regulatory guidelines. The other challenge would be to maintain a steady growth, as we have been noticing an increasing trend among the borrowers to defer their drawdowns in anticipation of a benign interest rate regime in the future.
When we can see this crisis receding and Rupee gaining momentum, as even ECB's recent move to infuse s much as Euro 489 billions in European banks did not yield desired results.?
Well, in the context of current macro economic situation it is difficult to give any specific response to your question. But I have hunch that with the onset of the new year there will be some positive trends particularly with inflation rate coming down and consequently remote possibilities of further hikes in interest rates. We can also expect significant inflow of funds from the NRI segment who in all probability will not miss the opportunities in huge interest rate differentials in NRE deposits. The inflows will surely boost the liquidity conditions.
Do you think banks are well capitalised to weather the present crisis.?
As of now, Indian banks are well capitalised. As far as we are concerned, our CRAR is nearly 13 percent within which Tier I capital is over 9 percent. With this we will be able to sustain normal growth for next couple of years. Still, we have recently arranged for Tier II capital of Rs 200 crore which would provide a cushion. We have also made an assessment of our capital requirement for next 5 years and have drawn a roadmap for raising the additional capital whenever needed. According to our plan most of our requirements would be met by internal accruals.
How has the downgrade of SBI by Moody's impacted the Market. Is there any further risk of downgrade in the banking sector.?
The stock market has already responded to this issue. However it would not be out of place to mention here that the resilience of Indian banking system has been tested time and again. I am sure that this time also the industry will demonstrate it's strong fundamentals.
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There are reports that the government might infuse funds in banking through equity. Is there any indication from the Govt.?
Last time when we got the capital support from the government, it was in the form of equity. It is up to the government t to decide on the form of it's future investments.
What kind of growth you expect in business this year?
Last financial year our credit growth was 26 percent. However since the very beginning of the current financial year we have been noticing moderations in the credit growth which came down to 17 percent yoy as on September end. I don't expect a sudden change in the growth pattern and therefore our estimate is that the growth in the loan book would be between 16 to 18 percent year-on-year. Our deposit growth will be in tune with the growth in the loan book.
How do you see the savings rate deregulation panning out for the industry?
Except a few banks in the private sector, so far we have not seen any move on the part of the psu banks as well as the bigger private sector banks to quote higher rate of interest rates for savings deposits. We are watching the Market and will keep pace with the other Market participants. Mathematically 100basis points rise in interest will translate into roughly an outflow of Rs 20 Crores per month.
What is the situation in NPA ?
It is indeed a major challenge and we are focussing our full attention to arrest further slippages and at the same time upgrade the existing NPAs by recovering the critical amounts. I am sure out efforts will yield positive results in the near future.