Our Network Is Diversified And Is Being Further Enriched - Debabrata Sarkar, Chairman & Managing Director, Union Bank of India

The slowdown in Indian economy may provide enough reason to worry but that is not going to slow down the pace of growth for the Union Bank of India, according to its Chairman and Managing Director, Debabrata Sarkar

• In India, financial intermediation is mainly bank-dominated and thus the future opportunities for banking will pan out in line with the demand and supply dynamics of Indian economy.
• We are looking forward to a more conducive interest rate scenario and expect the RBI to rescind current measures after achieving stability in currency.
• We are proactively seeking opportunities to increase income and make efficiency gains to save costs. These should help us keep the cost-income ratio at around 45 per cent.

How will the entry of new banking players change the banking landscape in India?

Indian banking is a vibrant landscape dotted with varied players operating in niche areas as also providing universal banking. Seen by ownership and place of incorporation, the commercial banks include public sector banks (PSBs), private sector banks, and foreign banks. Furthermore, there are cooperative banks and regional rural banks also catering to the banking needs of specific sectors and segments of economy. Considering the size and potential of India’s economy, the banking landscape has enough space for new players along with the incumbents. This will be a positive for the sector in terms of enhanced customer service standards, transparency in service, efficient product design and pricing, etc., as has been the experience with the entry of new private sector banks since the early ‘90s.

The new private sector banks that came on the scene had no appendage of legacy issues and could start with a better platform of technology. It was thus argued that PSBs would be no match for these new banks. However, the PSBs quickly realised the writing on the wall that one has to match the competition mark-to-mark. The fact that the PSBs continue to command about 3/4th of banking assets in India even two decades after there came new entrants to competition reflects their agility and adaptability to the changing business environment. The increased competition in its wake has improved the customer service standards across industry to a level unthinkable even 10 years ago. 

Now the new banking licenses are set to be issued again, with 26 players having applied for it. Will these new entrants pose challenges to the existing players? The experience would suggest rather contrary, although, there will be challenges like employee attritions, shrinking margins due to aggressive pricing by newcomers, etc. However, the lasting impact, one may fairly expect, will be in further raising customer service standards. Today, technology has levelled the playing field for all and the only differentiator that remains is the customer-centric approach of the respective banks.

What is your take on allowing a hike in FDI in the banking sector?

With the new Basel III regulations in effect, there is an increased requirement for capital by Indian banks. It is natural that part of it will be sought from non-resident investors given the extent of requirements. For private sector banks in India, the foreign investment limit is set at 74 per cent while it is 20 per cent for the PSBs. This ceiling is applicable to the sum total of foreign investment in private banks from all sources i.e. FDI, foreign institutional investors, and non-resident Indians. Liberalisation of governance regulations in the form of equity caps for foreign shareholders and caps on voting rights for both domestic and foreign investors have been pursued over time by the government. 

The Banking Laws (Amendment) Bill 2012, thus, has increased voting rights of investors in the private sector banks to 26 per cent from the existing ceiling of 10 per cent. The voting right of investors in public sector banks has been hiked to 10 per cent from 1 per cent. Diversification of ownership is desirable as also ensuring a fit and proper status of such owners and directors. Higher FDI limit in PSBs is desirable as it increases the ability of the banks to mobilise foreign capital to enhance their capital base.
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Are Indian banks adhering to prudential risk management norms followed globally? What are the further steps we need to take to strengthen our risk management?

Indian banks have been rather more robust and resilient compared to their global peers. A regulatory approach to risk management in India has focused on adequacy of capital along with proper identification of risks. The banks were required to maintain minimum capital adequacy ratio, under Basel II, of 9 per cent while the Basel Committee recommended 8 per cent. Even with the adoption of Basel III norms effective April 2013, banks have higher total capital and common equity ratio than the minimum required. Under Pillar 3 disclosures, banks disclose capital adequacy through public disclosures that are designed to provide transparent information on capital structure, risk exposures, and risk management, and internal control processes. 

Risk management globally is an evolving discipline. Like in India, the Reserve Bank of India (RBI) has initiated a system of risk-based supervision (RBS) and its pilot run has been started with select banks. The RBS process involves continuous monitoring and evaluation of the risk profiles of the banks in relation to their business strategy and exposures based on a risk matrix for each institution.

What do you consider to be the major growth drivers for the Indian banking industry in the long-term? How do you plan to capture the prospective momentum?

Finance is the driver as also beneficiary of the level of economic activity in an economy. In India, financial intermediation is mainly bank-dominated and thus the future opportunities for banking will pan out in line with the demand and supply dynamics of Indian economy. The current challenges notwithstanding, India remains a promising growth story from a medium- to long-term perspective driven by the favourable state of long run drivers of growth. The Indian growth story has benefitted from high and rising savings and investment as per cent to GDP. Such a dynamic is further seen extending with the help of factors like stable polity with democracy providing non-disruptive resolution of grievances; fair record of rule of law; high and rising proportion of educated workforce; younger population with declining dependency ratio; entrepreneurship; urbanisation; rising share of the middle-class; financial deepening; etc. 

Our strategy will be to align our business priorities in line with the long-run macro trends while being agile to immediate challenges and thus pursuing value creation for the stakeholders. With the challenges imposed out of the slowing pace of growth in the economy, we have focused on consolidating our business while focusing on core areas. Simultaneously, steps for deepening of financial inclusion continue. In terms of priority of business expansion, the focus is on sectors like agriculture, retail, and MSME. On the liability side, the bank’s emphasis is on increasing low-cost deposit and retail term deposit base, which are more sustainable in the long term. Our network is diversified and is being further enriched with a bouquet of delivery channels. The bank is also continuously engaged in enhancing customer service standards so that it remains a bank of choice for existing and prospective customers.  
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The potential is large but what are the major challenges that you face? How do you plan to overcome these hurdles?

In immediate term, the challenges are slow growth conditions with associated impact on asset quality. At the same time, deposit rates do not show any trend of softening which means pressure on margins. However, this is a transient phase and will not impact the core drivers of the country’s banking sector. From the medium-term perspective, it is more about capacity building, whether it is about serving hitherto unbanked sections of society or the next generation of customers with new demands and expectations, or finding replacement for our retiring and experienced workforce. 

Our focus is on continuously improving customer experiences across all channels. We are encouraged by the customers’ preference for alternate channels and are investing in capacity building, both in physical capital and human capital, to distinctly serve the changing customer profile. As for business expansion, we are set to increase our international footprints with branches to be opened at Sydney (Australia) and Antwerp (Belgium) as well as a subsidiary at London (UK) during the financial year 2013-14. Union Bank of India is investing in creating new customer-centric branch models in the country. These are called ‘UnionXperience’ branches. These branches provide high degree of automation where customers can avail multiple banking services through self-service kiosks. The speed of availing such services has increased since there is no manual intervention. The bank is determined to create many such conveniences for customers across the country.   

How do you see the interest rate scenario panning out ahead in FY14?

We have seen a fairly accommodative policy stance from the RBI for many quarters now. However, lately, the external sector challenges in the wake of high current account deficit amidst subdued growth have warranted actions from the RBI. These measures have pushed near-term money market rates to the higher side. However, seen in entirety, the measures are more like emergency support, and do not suggest becoming a norm ahead. We are thus looking forward to a more conducive interest rate scenario and expect the RBI to rescind current measures after achieving stability in currency. Accordingly, both loan and deposit rates be expected to soften a bit in the remaining part of FY14.  

What is your outlook on loan book growth for FY14? Which are the sectors that will spearhead this growth?

Considering the slow recovery expected in economy, our focus continues to be on pursuing quality growth. Accordingly, the Union Bank of India has set sights on capturing the opportunities prevailing in agriculture; retail; and micro, medium and small enterprises’ business during the year FY14. Our guidance for FY14 loan growth is around 16 per cent in sync with the RBI’s guidance for SCBs’ credit growth at 15 per cent. Our retail book size is also low at about 10 per cent of the total loan book. Hence, there is huge scope to expand the retail book. 

In the last few quarters, there has been a sharp decline in the cost-to-income ratios. What are the factors that led to such a decline, and how far is this sustainable?

The cost-to-income ratio for Union Bank of India stood at 44.70 per cent in fiscal year 2012-13 as against 43.15 percent in fiscal year 2011-12. Thus on a yearly basis, the cost-income ratio increased.  However, it noted substantially improved reading for the last quarter of 2012-13 and stood at 40.99 per cent. But, this may not sustain in the coming quarters since one of the important factors determining cost-income ratio is net interest income, and thus NIMs, which is expected to be lower. As you may be aware, advances are re‐priced downward immediately due to base rate and BPLR cuts, while deposit rates are sticky at high level. This has a negative impact on NIM. On the expenditure side, operating expenditure is expected to rise due to plans for network expansion, ATMs, and provision for pending wage revision. The liability on account of pension may also be higher during the year depending on the final guidelines of the IBA in this regard. However, we are proactively seeking opportunities to increase income and make efficiency gains to save costs. These should help us keep the cost-income ratio at around 45 per cent.

What would you say about the asset quality of your bank? How has the trend been and how do you envisage the situation will be going forward?

The gross NPAs of the bank as a ratio of gross advances came down to 2.98 per cent in March 2013 from 3.01 per cent as of March 2012. The decline in gross NPA is encouraging, particularly if we see the spike in NPAs during the quarter of June 2012 due to domestic economic slowdown and poor external demand. However, beginning quarter of September 2012, the bank was able to reduce the gross NPAs in absolute term as well as ratio to gross advances in each subsequent quarter. The entire rank and file of the bank is aware of the challenges to asset quality in a low-growth economy and therefore they are vigilant through better loan origination, underwriting, and right kind of monitoring approach. We expect the gross NPAs to be contained within 3 per cent of gross advances by March 2014. We will continue with our focus on recovery and upgradation, offsetting possible slippages. 

What are your expectations about major financial matrices such as NIM, CASA, and NPA by the end of FY14?

The current economic and banking scenario is truly a challenging one. The growth indicators remain subdued and new projects are not taking off while there remains huge amount of stalled projects. The deposit rates are high and sticky in the wake of near double-digit retail inflation while banks have low pricing power for loans. Even in this scenario, we are endeavouring for better asset quality, holding CASA at the present level, and protect margins. We look forward to maintaining NIM at around 2.9 per cent in fiscal year ending March 2014. The bank’s CASA ratio may be around 30 per cent. On the asset quality side, the objective is to contain gross NPAs below 3 per cent of gross advances by March 2014.