With the bulk-lending segment not growing sufficiently, profits will have to be generated by increasing non-interest income and fee-based income
The 95-year old Bank of India is one of the country's biggest public-sector banks with a network of over 2500 branches and over Rs 51,600 crore in deposits. In fiscal 2001, it logged a 46 per cent jump in profits of Rs 252 crore on total gross income of Rs 6,178 crore.
Now with economic growth slowing to a crawl, the bank, like many others, is scouring for opportunities to earn profits from different activities like treasury operations and retail banking. After finding itself tangled in a pay-order scam recently, the bank insists that it has adopted stricter control measures to ensure it stays well-protected from such situations again. K.V.Krishnamurthy, chairman and managing director spoke to Indira Vergis on how his bank plans to stay competitive in an increasingly tough environment.
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With the economic slowdown and low credit offtake, what investment opportunities are you looking at?
Going by current trends, overall growth this year in domestic credit, particularly in the non-food sector, may not be substantial. Much, however, will depend on growth in the agricultural sector and a good monsoon. If the efforts currently underway at the government level to kick-start the economy bear fruit, the adverse impact will be contained.
More than investment opportunities, yields on investment are a major problem. The yields today, particularly at the shorter-end of maturities is below the cost of raising funds, leave alone giving a decent margin.
With wafer-thin margins, it is difficult to go in for lower-rated paper and the dice today seems to be loaded against taking risks and expanding the advances portfolio. It is simply not possible to lend at rates prevalent abroad with the default rates prevalent here.
With corporate lending faltering, what other avenues are you looking at?
With the bulk-lending segment not growing sufficiently, profits will have to be generated by increasing non-interest income and fee-based income. We are in the process of re-aligning the cost of deposits in tune with declining yields from deployment which will help in maintaining the spread.
Future growth will be led by technology and though initial capital requirements may be high, overall operating costs are expected to come down significantly for incremental business. We are placing greater emphasis on areas like retail banking, treasury operations and funds management.
We have introduced products like cash management, depository services etc and will be looking at areas like distribution of insurance and other products that can bring in non-interest income. We will be looking at non-interest income growth of around 15-20 per cent each year over the next 2-3 years.
With the economic slowdown, is there a possibility of bad debts increasing for the banking sector as corporates find themselves unable to repay?
The risk you mention is very real. There needs to be a complete overhaul in the mental attitudes of borrowers. The climate for recoveries will have to be improved and options available to lenders when defaults occur need to be broadened.
Fortunately, the RBI and the government ares alive to the problem and actions like repealing SICA, abolishing BIFR, introducing more DRTs, making the list of defaulters public, etc are steps in the right direction.
The case of units facing genuine difficulties will have to be treated differently from that of wilful defaulters. We will be providing support to units facing temporary cash flow problems due to the economic slowdown by re-scheduling their payment obligations and re-structuring.
What is your target for non-performing asset levels this year? What are the major sectors that constitute most of your NPA levels?
We will be looking at bringing down gross domestic NPA levels to below 10 percent and net NPA levels to under five percent of advances by the end of the year.
We have substantial exposure to areas like iron and steel, metals and textiles which are also major contributors to NPA levels. Petrochemicals is also an area of concern as this sector is exposed to intense competition from overseas suppliers.
In an era of cost-cutting, are you looking at reducing the number of branches? Are all your branches viable?
We are definitely looking at reducing operating costs. Some of our branches opened during the phase of expansion, particularly in the rural and semi urban areas, do not add any value to our business.
There are around 200 branches where volumes are not adequate and which may need a longer time frame to match our expectations. We will explore the possibilities of mergers/closures wherever required.
What are your plans for the various subsidiaries? Are there plans to sell any of them?
We have reviewed operations of our subsidiaries and decisions are being taken to close those that do not generate adequate volumes/revenues. Our mutual fund operations have reduced substantially after redemption of schemes like BOI Double Square Plus and we are negotiating with other players in the market to take over the remaining three schemes.
Subsidiaries like BOI Asset Management will then be redundant. The merchant bankng activities of subsidiary BOI finance will now be done departmentally within the Bank.
We will however continue with subsidiaries like BOI Shareholding, which runs clearing house operations of Bombay Stock Exchange. Fortunately, the Bank`s overall investments in its subsidiaries are not substantial and their closure will not have any major impact on the Bank.
What is your bank doing to compete with aggressive private sector banks in terms of automation?
We have drawn up an extensive technology plan which is in the process of implementation. The process involves increasing the number of fully computerised branches, fully computerising the back office operations and streamlining the MIS and Risk Management Systems.
We have drawn up an extensive plan for networking of 275 branches across 9 cities in the Country. A technology upgradation plan for ATMs is already in place. The Bank will install around 250-300 ATMs in the next 2-3 years, both on-site and off-site.
What is the progress on the new credit inspection system that was supposed to be in place by September 2001?
The Bank has in place an extensive credit inspection system which covers various categories of accounts based on volume and risks involved. What you are referring to is implementation of the revised Credit Information System. We have provided all branches with at least one PC to run this computer based database product. The system will cover 100 per cent advances as against only 10 per cent earlier.
The periodicity of data collection will be quarterly as against the present half yearly system. The infrastructure for implementation of the revised system is in place and will be capturing September-end data from all branches. The information will be collated at the head office and extensive analysis will be done to assess credit risks and taking pro-active measu-res/policies for deployment of credit.