 "We have stayed away from head office driven business: KR Kamath")
Punjab National Bank, which was cautious about growing its balance sheet in the last couple of years, now says the consolidation phase is over and the bank is now on the growth path. KR Kamath, chairman and managing director of the bank, shares the road ahead in an interview with Manojit Saha. Edited excerpts:
Despite the rise in asset quality, the bank’s margins were stable around 3.5% for the last six quarters. What was the reason for that?
We control our net interest margin from the cost side and not from the yield side, in short we control our cost. We have shed our bulk deposits, which were about Rs 88,000 crore till September 2012, to Rs 22,000 crore. We are not present in the certificate of deposit market for quite some time now. As a result CD has come down to Rs 11,000 crore from Rs 24,000 crore, one year back. At the same time, we have improved the share of low cost deposits, which is now over 40%. These are efforts that have helped us maintain NIM of 3.5%.
How long will you be able hold on to this level of NIM?
Well, there is a limitation when you work through the cost route because once you shed the entire bulk deposit the benefit is no longer available. NIM may come down to 3.25% over a period of time. However, we have sustained it till now.
Do you think, the bank will hold on to the margins in the fourth quarter?
The margins will depend on how credit picks up, only then will we be able to decide how much deposit we will garner. In addition, the bank has been conservative on the credit side focusing more on retail agriculture and SME.
But the business growth has been very sluggish, with both credit and deposit growth in single digits (year-on-year) till December end. How long will this caution continue?
It depends on how do you look at the numbers. On the deposit front, our overall core deposit is growing by about 23%. The savings bank deposit is growing by 14%. The current account deposit growth, which was negative for the last two-three years, has now become positive. In addition, the term deposits, which were taken at card rates are also growing by 30%.
But overall deposit growth is in single digit because of the reduction in bulk deposit, which was a conscious effort. Let me also add that we have moved on to double digit growth on year-on-year basis now. By March we should be able to catch up with the industry growth both on credit and deposit side.
What is the strategy on the advances side?
On loans, our focus is on retail, agriculture and small & medium enterprises. We have stayed away from head office driven business, on both deposit and credit, and are focusing on branch driven business, which has to come from retail. Till the time retail completely substitutes corporate business where the demand is sluggish, the growth rates will look low. But, this strategy is in place for the last 15 months. The consolidation phase is over and we have now moved on to double digit growth.
On the credit side, the focus is on the MSME sector but at the same time maximum stress on asset quality is also coming from this sector. Do you think, you will have to change your strategy on this issue?
MSME is a vast canvas. While I agree that MSME is a vulnerable sector, but it is not correct to say that every MSME is vulnerable. So, when there is no demand for credit from the corporate side for new investment, we are leveraging our branch network for credit growth. We have over 6,000 branches and have focused on branch led business i.e retail, agriculture and MSME.
Asset quality remains a concern for the bank with slippages far exceeding recovery. What are the strategies to curb slippages?
Asset quality is a direct reflection of the state of the economy. The economic revival did not materialise as expected, which has resulted in increased stress on asset quality. So far as the recovery is concerned, even if we take possession of a security or an asset and try to sell, it is difficult to get a buyer in these economic conditions and realise the optimum price for the property under sale.
If you see incremental delinquencies, the second quarter was better than the first and the third quarter was better than the second.
How well is PNB equipped to comply with the new NPA regime of early detection, which will be implemented from April?
As I said my incremental delinquencies are coming down, which means we are monitoring the account much more closely than the past. Our effort has always been that if the borrower is under stress, first we try to support through rehabilitation or restructuring because it is not only NPA for the bank but for the economy. Hence the focus is to put it back on performance track. I think we are aligning ourselves to the new regime. Only thing is that both the bank and the customer may have to be given some more time for migration to the new regime.
The government had infused Rs 500 crore capital in the bank this fiscal. Have you requested for any further infusion?
There was an indication in October that if we focus on retail loan growth, the government will infuse further capital. Our sanctions in the retail side during the October-January period was Rs 2,900 crore, which was mainly due to housing loans.
Apart from this, we have issued Rs 1,000 crore Tier-2 bonds which will improve our capital adequacy ratio. I am quite optimistic that when the economy makes a turnaround, we will have a good write back from provision made for NPA’s and investment depreciation. Overall, we shall be in a position to manage our capital requirement. We are working out on plans to meet capital requirement for long term.
Despite the rise in asset quality, the bank’s margins were stable around 3.5% for the last six quarters. What was the reason for that?
We control our net interest margin from the cost side and not from the yield side, in short we control our cost. We have shed our bulk deposits, which were about Rs 88,000 crore till September 2012, to Rs 22,000 crore. We are not present in the certificate of deposit market for quite some time now. As a result CD has come down to Rs 11,000 crore from Rs 24,000 crore, one year back. At the same time, we have improved the share of low cost deposits, which is now over 40%. These are efforts that have helped us maintain NIM of 3.5%.
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Well, there is a limitation when you work through the cost route because once you shed the entire bulk deposit the benefit is no longer available. NIM may come down to 3.25% over a period of time. However, we have sustained it till now.
Do you think, the bank will hold on to the margins in the fourth quarter?
The margins will depend on how credit picks up, only then will we be able to decide how much deposit we will garner. In addition, the bank has been conservative on the credit side focusing more on retail agriculture and SME.
But the business growth has been very sluggish, with both credit and deposit growth in single digits (year-on-year) till December end. How long will this caution continue?
It depends on how do you look at the numbers. On the deposit front, our overall core deposit is growing by about 23%. The savings bank deposit is growing by 14%. The current account deposit growth, which was negative for the last two-three years, has now become positive. In addition, the term deposits, which were taken at card rates are also growing by 30%.
But overall deposit growth is in single digit because of the reduction in bulk deposit, which was a conscious effort. Let me also add that we have moved on to double digit growth on year-on-year basis now. By March we should be able to catch up with the industry growth both on credit and deposit side.
What is the strategy on the advances side?
On loans, our focus is on retail, agriculture and small & medium enterprises. We have stayed away from head office driven business, on both deposit and credit, and are focusing on branch driven business, which has to come from retail. Till the time retail completely substitutes corporate business where the demand is sluggish, the growth rates will look low. But, this strategy is in place for the last 15 months. The consolidation phase is over and we have now moved on to double digit growth.
On the credit side, the focus is on the MSME sector but at the same time maximum stress on asset quality is also coming from this sector. Do you think, you will have to change your strategy on this issue?
MSME is a vast canvas. While I agree that MSME is a vulnerable sector, but it is not correct to say that every MSME is vulnerable. So, when there is no demand for credit from the corporate side for new investment, we are leveraging our branch network for credit growth. We have over 6,000 branches and have focused on branch led business i.e retail, agriculture and MSME.
Asset quality remains a concern for the bank with slippages far exceeding recovery. What are the strategies to curb slippages?
Asset quality is a direct reflection of the state of the economy. The economic revival did not materialise as expected, which has resulted in increased stress on asset quality. So far as the recovery is concerned, even if we take possession of a security or an asset and try to sell, it is difficult to get a buyer in these economic conditions and realise the optimum price for the property under sale.
If you see incremental delinquencies, the second quarter was better than the first and the third quarter was better than the second.
How well is PNB equipped to comply with the new NPA regime of early detection, which will be implemented from April?
As I said my incremental delinquencies are coming down, which means we are monitoring the account much more closely than the past. Our effort has always been that if the borrower is under stress, first we try to support through rehabilitation or restructuring because it is not only NPA for the bank but for the economy. Hence the focus is to put it back on performance track. I think we are aligning ourselves to the new regime. Only thing is that both the bank and the customer may have to be given some more time for migration to the new regime.
The government had infused Rs 500 crore capital in the bank this fiscal. Have you requested for any further infusion?
There was an indication in October that if we focus on retail loan growth, the government will infuse further capital. Our sanctions in the retail side during the October-January period was Rs 2,900 crore, which was mainly due to housing loans.
Apart from this, we have issued Rs 1,000 crore Tier-2 bonds which will improve our capital adequacy ratio. I am quite optimistic that when the economy makes a turnaround, we will have a good write back from provision made for NPA’s and investment depreciation. Overall, we shall be in a position to manage our capital requirement. We are working out on plans to meet capital requirement for long term.