'Non-payment of dues to be addressed'

BANKER SPEAK: SK GOEL, CMD, UCO BANK

Soon after taking over as the chairman and managing director of Kolkata-based UCO Bank, SK Goel gave a call to all UCO-ites to arrest the fall in business, the rise in non-performing assets and the drop in net interest margins. Goel has put on hold the follow-on public offer by the bank till the time the bank realises a share price closer to the book value of Rs 70. Goel spoke to Abhijit Lele and Shriya Bubna of his plans to tackle the challenges facing the bank head-on. Excerpts:

What is your assessment of the challenges facing UCO Bank?

The bank has seen a substantial growth in business in keeping with the banking sector trends. Yet, there are three aspects that need urgent attention "" drop in its net interest rate margin (NIM), decline in share of low-cost deposits [current account and savings account (CASA) deposits] and rise in gross non performing assets (NPAs). One of the reasons the major business parameters suffered was that the management lost its focus. The management had to spend much time in dealing with problems with the union. The unions have now withdrawn their agitation.

What is the extent of drop in low-cost deposits and what caused them?

The share of current and saving deposits has slipped below 27 per cent from 32 per cent. The focus was largely on big branches bringing in high-value business. This situation has to change now. I have to develop small- and mid-sized branches in rural and semi-urban areas to generate more CASA deposits.

Instead of concentrating on just 7-8 branches, we will concentrate on the other 80 branches in a region. These branches give business but the CASA deposits will come only from other branches. From September 1, we will be starting a CASA campaign to increase the deposit base.

If required there will be changes in the structure at zonal level. We are considering bringing all four zonal managers of Nagpur, Ahmedabad, Goa and Mumbai under one general manager in Mumbai. This alone would account for 30-35 per cent of total bank business.

We are pushing for the CASA deposit share to reach 30 per cent by March 2008 and 32 per cent by June. The performance on this front has direct bearing on the net interest margins.

Why does the bank's NIMs continue to be under pressure?

The net interest margins (NIMs) have taken hit as the gap between cost and yield has narrowed. While costs went up, yields did not go up proportionately. NIMs have dipped to 2.42 per cent and the challenge is to take them to beyond 3 per cent, at least to 2.80 per cent by March 2008. The overall growth in credit was very slow. I have lost only bulk deposits, which was a cause for falling NIM, consciously. I have told my branches not to lend (term loans to corporates) at less than 11 per cent. For September, we expect the business volume to be slightly above the March figures. In the next two quarters, we should be able to make good the loss we saw in the business in the first quarter of 2007-08. The business should grow at 20 per cent on a yearly basis.

Is the rise in non-performing assets a cause for alarm?

The bank has seen substantial increase in non-performing assets in the last few quarters. The gross NPAs stand at 3.85 per cent and net NPAs are at 2.3 per cent. We are working to bring down the level of gross NPAs to around 2 per cent and net NPAs to 1 per cent by September next year.

Slippage's may happen in normal course. There are defaults in light of factors beyond control and natural calamities such as the floods in Bihar and Orissa. Farmers in the such regions are struggling for their very existence. Barring such circumstances, non-payment of dues have to be taken seriously.

The high value NPAs are not much. There are defaults in retail loans as due to the low interest rates, everyone wanted a house. However, there has not been as much appreciation in prices, while the interest rates have increased. So, the normal investors are feeling the pinch. Recovery is top priority for us. We have put two general managers and 300 employees on this task. People are responding and the bank has recovered about Rs 171 crore in August itself.

Is the bank adequately capitalised to grow its businesses?

At present, the capital adequacy is comfortable. The bank does not want to raise the capital, which it does not want. Servicing capital is a costly proposition. The bank had raised hybrid capital at 9 per cent last year, which we have to service. We have an overseas presence and have to meet the Basel II norms by March 2008. Even after providing for operational risk under Basel II guidelines, we expect the capital adequacy to be 10.75 per cent by the end of March next year. We have submitted a capital restructuring proposal to the government in August.

Could you elaborate on the capital restructuring plan?

The high capital base has pulled down our earning per share (EPS) to 2.7, impacting scrip price. Our share price was Rs 12 at the time of listing and now it is touching Rs 34. We have proposed that Rs 300 crore equity capital out of present Rs 800 paid up capital be converted into preference shares. The restructured capital has potential to double the EPS. The government should respond soon. The book value per share is Rs 70. Once we get the right share price, soon after March 2008, we should go for a follow-on public offer. The next move will be to go for an FPO, whenever the need be. The government holds 76 per cent, which leaves us with headroom to dilute 25 per cent holding.

What are your plans for augmenting your fee income?

We are doing very well in terms of fee income. We have tie-ups for distributing Life Insurance Corporations' policies, mutual funds and money transfer with Western Union. We are still open to any proposal that will add to our fee income. This could be in the area of non-banking services. For example, the rural branches could be used for fertilizer and used seeds distribution. Whatever is within legal means of earning commission, we are open to that. Another instance could be of installing weighing machines in my branches. If the company is paying me for that, the machine could be in one corner and my customers would also be happy. All such forays will be pursued after considering the legal and regulatory aspects.