'No need for govt to dilute stake'

State-owned Punjab National Bank (PNB) feels that it would not be prudent to further dilute government holding from the current 57 per cent. The floor for the government stake is 51 per cent. The bank wants to keep that marginal comfort for making a follow-on equity issue on bad days.

The second largest public sector bank also needs to cover a lot of ground before foraying into life insurance, the bank's new Chairman and Managing Director K C Chakrabarty told Prashant K Sahu in an exclusive interview. Excerpts:

Any plan to restructure PNB's subsidiaries?

The two subsidiaries "" PNB Gilts and PNB Housing Finance "" were created when banks were not supposed to focus on these businesses. But, now the bank itself is focusing on gilt business and is conducting the housing finance business in a very aggressive manner.

We have to see what is the use of continuing with these two subsidiaries. We are also analysing what gives more shareholder value "" keeping them separate or merging the two subsidiaries. If we feel that merger will give greater economic value, we will do so. May be in another three months, we will come to a definite conclusion.

When is PNB entering into life insurance and credit card business?

Entering into a new line of business requires a lot of planning and groundwork. I don't think we will be able to start a life insurance business this year. But in the case of credit card, the necessary groundwork has been done and the company will start working next year.

What is PNB's capital raising plan?

We have limitations as the government's shareholding cannot go below 51 per cent. This is a legal restriction put in by Parliament. The government holds 57 per cent stake in the bank and it can dilute its stake only up to 51 per cent. I don't think it is very economic. I have to keep the 6 per cent for emergencies too.

But for tier-I and tier-II capital raising, I have many other options. I can raise Rs 1,500 crore in tier-I capital through perpetual debt and Rs 1,500 crore in tier-II bonds. This year, we will concentrate on raising capital through innovative tier-I or tier-II instruments. Tier-I equity capital raising is not on our immediate agenda. In the next two years, the bank will require at least Rs 4,000 crore.

What is the interest rate outlook?

There is no question of interest rates going down. Because the next cycle will be rising interest rate cycle. Demand for credit has not slowed. Only credit requirement for speculative purpose has definitely come down. Serious players still require money. Unless the inflationary expectation stabilise at a lower level, we are not going for a change in interest rates.

What kind of business growth you expect in 2007-08?

Deposit growth depends on consumer behaviour. Deposit growth will be 18-19 per cent this fiscal. We would like to grow at the same rate. So far as advance growth is concerned, we would like it to be not more than 21 per cent. Because this target itself is a challenging one as this growth is on a higher base.

Is the bank prepared for implementation of Basel II norms?

For regulatory requirement, there is no problem. But if you look Basel II as a business opportunity, its implementation is an opportunity to bridge the gap between regulatory capital and economic capital by introducing better risk management standards into the system. Thereby reducing requirement of economic capital. I think it will take another 4-5 years for the system to get to that stage.

Government has been advocating merger of banks for gaining size?

Finance is a business of size. If I have to function globally and compete at that level, I must have a minimum size. For that we have to consolidate, but the time for consolidation has not come. Suppose, all public sector banks are merged, then only it will become the 52nd largest bank in the world.

But consolidation happens in an industry where there is proliferation of products and services. We are talking about consolidation when 60 per cent of population is not having a bank account, 80 per cent of population is not having access to insurance product and 98 per cent of population is not having access to capital market products.

Under this situation, what is more important is financial inclusion than consolidation. Our priority will be financial inclusion, then only consolidation will be acceptable to the society. Till that time, we are trying to create awareness that there is a need for consolidation. So there is a need for a dialogue, there is a need for a strategy. When the time for consolidation comes, we will definitely go for acquiring a bank.

What are your views on public sector vs private sector banks? There is nothing called a private sector bank. Banks are dealing with public money, they are accountable to public and they are regulated.

Because government ownership is there, there is a little less level playing field for the so-called public sector banks. There is a greater level playing field for the so-called new generation banks, which are also in my view public sector banks, because their promoters are government-sponsored institutions.