Bad loans recovery tops PNB agenda

Bank aims to recover Rs 1,500-2,000 crore NPAs by 2007-08.

Punjab National Bank's (PNB) high non-performing assets (NPAs) are likely to weigh on its third quarter net profit, according to Chairman and Managing Director K C Chakrabarty.

In the current financial year ending March 31, PNB is placing a huge thrust on recovery of bad loans. "We aim to recover Rs 1,500-2,000 crore (of loan slippages) by March," Chakrabarty said in an interview.

The state-run bank's total loan slippages were over Rs 2,000 crore in the first six months of 2007-08 (Apr-Mar) compared with Rs 2,000 crore slippages in the full year of 2006-07. So far in 2007-08, the Delhi-based bank had recovered Rs 800-900 crore, Chakrabarty said.

"We are purposely pruning our credit growth to prevent fresh occurrence of NPAs. But there are some NPAs in the books that occurred in the last few years," he said.

"I want to consolidate my (bank's) credit growth," he said.

The bank expects a credit growth of 22-24 per cent in the current financial year compared with around 30 per cent a year ago. It is confident of achieving net profit target for the third quarter, which has already accounted for the NPAs, Chakrabarty said.

The bank has no plans to sell its bad loans to an asset reconstruction company as the pricing of such sale of bad loans is not profitable, he said.

"These NPAs happened in the last one-and-a-half years. We can sell NPAs only above a certain tenure," he said.

PNB targets a net NPA of 1.50-1.75 per cent and gross NPA of 4 per cent by March-end. Its net NPA was 1.80 per cent as of end-September.

Despite being one of the largest state-run bank by assets, according to a study by Dun & Bradstreet some months ago, PNB's shares have not seen a big rise compared with its peers like Canara Bank and Bank of Baroda, primarily because of the large base of bad loans.

Since April, PNB's shares rose 26 per cent compared with Canara Bank's 40 per cent rise and Bank of Baroda's 67 per cent. However, analysts are optimistic about the bank's NPA recovery process and recommend a 'buy' on the mid-cap stock.

INTEREST MARGIN
The bank has been able to maintain a healthy net interest margin of above 3 per cent and expects to end the financial year with 3.5 per cent margin, Chakrabarty said.

"The thrust is on loans to agriculture, education, small and medium enterprises, retail sectors. These give us a good margin," he said.

PNB's net interest margin was 4.1 per cent in 2006-07.

Pressure on banks' net interest margin aggravated following the Reserve Bank of India's (RBI) 50-basis-point hike in the cash reserve ratio (CRR) in October.

Banks have been reducing their deposit rates to dilute some impact of higher cost of funds following the CRR hike, as they can't afford to raise lending rates following the slump in credit growth.

Banks now have to keep 7.5 per cent of their deposits with RBI and the central bank doesn't pay any interest on this CRR balance.

MALAYSIA PLAN
PNB is not likely to be a part of the joint venture with Bank of Baroda and Andhra Bank for setting up a bank in Malaysia as the capital requirement is huge, Chakrabarty indicated.

"The plan is deferred for the moment," he said.

PNB, in partnership with Allahabad Bank, is looking for tying up with a bank in Kazakhstan, he said.

CAPITAL NEEDS
Punjab National Bank has raised Rs 500 crore of tier-I capital via perpetual debt and has room for another 9 bln rupees in perpetual debt.

It also has scope for raising up to 10 bln rupees in upper tier-II capital.

However, the timing for raising capital will depend on the market conditions, Chakrabarty said.

The bank's capital adequacy ratio is 12.4 per cent.

It has no plans to raise equity capital by diluting government holding, as the cost of servicing equity is very high. The government holds 57 per cent in the bank.