During the global financial crisis, Indian banks showed resilience. Now, when the economy is shrugging off the effects of the crisis, signs of stress on the sector are emerging. Asset quality is under pressure for most and so is treasury income. Besides, liquidity has tightened and monetary policy tightening has begun. Union Bank of India Chairman & Managing Director M V Nair, also the chairman of the Indian Banks Association, tells Manojit Saha and Sidhartha how his bank plans to meet the challenges. Excerpts:
How difficult will it be for banks over the next few months?
It’s a slightly different scenario than what was prevailing last year. Credit pick-up is taking place and with last year’s GDP growth driven by industry, investment is taking place. So, credit growth will be robust this year and should be 20-22 per cent. In the first half, liquidity in the system is sufficient, after factoring in the government borrowing programme and private sector demand.
There will be some pressure in the interregnum, as things like 3G payment were not factored in. But once government spending takes place, liquidity will come back. The bias for interest rates is to move up, which was made very clear by the central bank. So, the possibility of cheaper credit is coming down.
Will liquidity be sufficient even after the broadband auctions, which have already seen bids of close to Rs 25,000 crore?
Out of the Rs 65,000 crore outflow for 3G, the impact on the banking system is estimated to be Rs 45,000 crore. The Reserve Bank has given half a per cent leeway by reducing the statutory liquidity ratio, which will mean Rs 20,000 crore. And, the size of the T-Bill (treasury bills) auction in June has been reduced by Rs 22,000 crore. So, it matches. Without factoring the liquidity available with mutual funds, I don’t think banks will right now access the half a per cent leeway in liquidity given by RBI, because liquidity is there.
As for broadband, when this amount goes to the government, how much will be the government borrow? That needs to be seen.
If the cost of funds goes up, will investment demand slow down?
The cost of funds may not rise substantially. Our reading is, in the first six months, if liquidity is manageable, there may be an upward bias in interest rates, but a sudden spurt may not take place. The present level of rates, considering the Indian situation, will support growth. We will wait and see how it turns out after September, depending on how government borrowing shapes up.
When will you start passing on higher interest rates to customers?
An increase in policy rates may not put undue pressure for banks’ rates, as liquidity is expected to stay. What we are seeing is that loans below the benchmark prime lending rate (BPLR) will get re-priced. If somebody had taken a loan at 6.5 per cent earlier, we are now charging 8.5-9 per cent, depending on the cost. However, those rates continue to be below BPLR.
Have margins peaked for banks, given that the cost of deposits has gone up?
Yes, when I look at my portfolio, we may not have substantial reduction in cost of deposits. Our net interest margin in the fourth quarter was high at 3.34 per cent. It may come down to 2.9-3 per cent for 2010-11.
Which is the cost parameter the bank has chosen to calculate the base rate? What will be your base rate?
We are still in the process. We are looking at various benchmarks. One is the average cost, the other is the average cost for the last quarter, which factors in the latest interest rates, and the third is the marginal cost of funds. Our current thinking is to look at the last quarter’s average cost. In that case, the base rate is coming between 8.25 per cent and 8.5 per cent. But we are yet to take a final call.
Most banks, including Union Bank, have seen higher slippages. How do you explain the situation, when the economy is on the growth path but asset quality is not moving in the same direction?
When the economy goes through a strain, some sectors get impacted badly. It takes time for them to overcome. But NPAs (non-performing assets, or bad loans) should peak by September.
What is the game plan now? Will you slow the tempo, as some large players have done?
For Union Bank, the strategy is very clear. We were going through a major process of transformation. The idea is to create capacity to grow at least five per cent higher than the industry, but grow profitably and maintain the quality of assets. In the last three years, we have been growing five per cent above the industry average and our return on assets has been 1.25 per cent consistently. The cost to income ratio is 40 per cent, one of the lowest in the industry. In three years, we have opened more than 500 branches. This year, we are planning to open another 500 branches, depending on our ability to support through people.
Have you finalised Navnirman-II, the road map for the second round of organisational change?
Yes, we discussed our growth process in the next decade. Navnirman-I was a vision till 2012, while this one is till 2020. But, most of the initiatives will be taken in the next two years, with focus on six pillars.
The first is to capture the growing middle income segment by entering the wealth management business. The second area of thrust is financial inclusion, given the opportunity at the bottom of the pyramid. The third pillar of transformation is human resources practices, for which we have appointed Hewitt as consultant. Fourth, we have identified risk management, and systems and controls, as an area of improvement. Fifth is branch expansion and the sixth is transforming customer experience, where we want to be the best in the industry.
When are you planning to start the wealth management business?
Our asset management venture is expected to start selling products from October. That is the time we will try to enter wealth management services, through a joint venture with a 51 per cent stake. We are yet to decide the foreign partner.
