Amid the ongoing global recession and financial turmoil, Union Bank of India is benefiting from its new strategy. The bank now needs Rs 2,000 crore to fund its expansion plans. In a wide-ranging interview, Union Bank of India Chairman and Managing Director M V Nair tells Abhijit Lele and Sidhartha that a part of this amount is expected to come from the government and that, to plough back money, the bank intends to wait till its net interest margin (NIM) reaches 3.24 per cent. Excerpts:
There are indications that things are looking up for the Indian industry. Do you share the optimism?
Things are looking different. To quote one example, the ABN Amro Purchasing Managers’ Index is showing signs of growth, which is very positive. When we review developments in a six-month time frame, what stands out is that we have been focusing on increasing our lending, especially with deposit flows remaining quite high. Between October and March, Union Bank has seen a 200 per cent rise in loan sanctions.
However, disbursals have been only 29.5 per cent higher during the year. What this means is disbursals are taking time. An entrepreneur, who has a project in hand, will not decide on the project just on the basis of my loan sanctions, but on the basis of the overall environment. Performance in sectors such as auto and steel shows that disbursals will increase. Similarly, home loan off-take had decreased because it was related to the sale of flats by builders and sales had decreased as prices were perceived to be too high. The feedback is that with price corrections, demand has increased of late. So, home loans should pick up now. On behalf of public sector banks, I can say that in India, credit did not dry up and it has been flowing freely.
There have been financial closures in recent weeks. Are new projects coming up?
The demand is lower. But now onwards, disbursals will improve. For instance, nearly Rs 19,000 crore of what we have sanctioned is yet to be disbursed.
Why has there been an increase in your SLR holdings?
We are in a slightly unique position. Owing to our brand strategy, we focused on technology, processes and people. And, as a collateral benefit, there has been a huge response and our customer acquisition has gone up. In 2008-09, we opened 3.3 million savings bank accounts in addition to 3.7 million in the two previous years. Incidentally, due to the global financial crisis, there was a flight to safety and our deposit grew by 34 per cent last year, while advances surged by 29 per cent. On both counts, we grew faster than the industry and hence our SLR went up.
Banks are heavy investors in mutual fund instruments. Is that a worry?
A treasury’s primary role is to deploy surplus funds and deploy them profitably. I cannot ask my branches to stop accepting funds when demand for loans has come down. After meeting the reserve and SLR requirements, the treasury has the option to deploy surplus funds in commercial papers, swaps, mutual funds etc. It will invest on the basis of returns and there is nothing wrong with it. From the mutual funds’ angle, liquid funds are transitory ones. But banks are going into such funds as, at present, there are not enough lending avenues.
There have been suggestions that there is scope to lower interest rates further. What should we expect from you in the coming days?
If you look at the cost structure, cost reduction started from January. But because of the structure, margins decreased in the fourth quarter. In May, our cost would have decreased by 6 basis points (bps) and in June and July there would be another 23-bps reduction. So, in the first quarter, margins will remain under pressure. Margins will start improving from July and the cost of funds has to come down. We want to have a net interest margin (NIM) of 3.24 per cent and we are not anxious to take it beyond that. At that level of NIM, we get enough capital to plough back for our expansion. We will pass on to the customers whatever benefit accrues to us after that.
How much capital injection are you seeking?
Our Basel-II capital adequacy ratio is 13.25 per cent and Tier-I is 8.25 per cent. We have sufficient room for Tier-II capital and we can do a Rs 200-crore perpetual bond issue. We want to grow at 25 per cent; we have global aspirations and plans for mutual fund and insurance joint ventures. To meet these aspirations, we will need Rs 2,000 crore. While we can generate surplus internally, more capital will give us headroom for Tier-II capital.
Has your new positioning helped?
Yes. It is not just about rebranding. The processes have changed and we are promising delivery. In addition, it has helped us attract more customers. The way we positioned ourselves, younger generation customers, who are comfortable with technology-based products and services, are now coming to us. For instance, we have been tracking the use of alternate channels of banking. We have found that 6 per cent of our customers were using those channels on April 1, 2008. A year later, the number was 21 per cent and by the end of this year, we expect it to go up to 35 per cent.
