The Need Of The Hour Is Adopt Technology - Arun Kaul, Chairman And Managing Director Of UCO Bank

Arun Kaul, Chairman and Managing Director of UCO Bank, has been able to achieve an amazing turnaround in the bank’s fortunes in a short period and has now set sights on using a wide portfolio of business strategies to increase profitability and long-term sustenance.

• We embarked on a major drive to open more branches and set up almost 500 branches in just three years.
• There are around 6.5 lakh villages but rural penetration in terms of branches is abysmal, thus presenting a huge untapped market.
• Going forward, once the temporary hiccup in our economy is cured, the journey of softer interest rates will begin again.

What were the challenges that you faced when you took charge, and how did you meet them?

I joined UCO Bank nearly three years ago and was faced with three to four major challenges, the first of which was that the CASA was very low at about 21 to 22 per cent. Further, the quality of assets was a major issue and in terms of technology the bank was not up to the mark despite achieving 100 per cent CBS in 2010. There also were some pending HR issues. It became clear to me that the bank’s performance had taken a hit after nationalisation in 1969. Moreover, the bank had suffered losses for up to a decade from 1985 to 1995. The situation was brought under control with the help of government incentives that included the infusion of capital to roll back the losses. From 1999 the focus was on building up the balance-sheet. The strategy that the bank adopted at that point of time was to pitch for large corporate credits given the fact that the economy was doing well and a lot of infrastructure and other projects had been initiated.

When I came on board in 2010 the first thing I realised was that credit to large corporates would have to be reduced in view of the slowdown in economy. Therefore, the focus was changed to retail banking. It also became clear that the CASA was low because of less activity in terms of branch expansion and customer acquisition and service. In fact, during the golden period of banking from 1985 to 2010, UCO Bank had fallen far behind in the race to expand and had flagged off only 431 branches in 25 years. Also, the available products were not market-related. Therefore, we embarked on a major drive to open more branches and set up almost 500 branches in just three years. Our next focus area was customer acquisition which had been hitherto neglected. Our current rate of adding new customers is 10,000 per day. This has helped the CASA to improve tremendously, which is currently at 35 per cent. We expect this pace of improvement to continue. 

We also re-launched various products to strengthen bulk deposits. This has resulted in core deposit growth of 38 per cent in the last fiscal. Earlier, more than 75 per cent of the bank’s assets were of corporate credit and credit to the infrastructure sector. Our reduction to that exposure has also helped. We have also set up hubs for SMEs while the agriculture sector has been contributing well too. The fact remains that you cannot start a recovery process until you declare your NPAs and that is precisely what we did to begin afresh. We believe that the worst is over and there will be an improvement in the NPA levels also. On the technological front, we have set up around 1,600 ATMs and are working on taking this to 3,000 by the year-end. We are also set to launch technology-driven products like mobile banking and internet banking, while starting to issue debit cards, etc.

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

You have to first understand that India is a large untapped market and almost 50 per cent of the population does not have access to any banking facility. There also are subsets to the financial system such as insurance, mutual funds, etc. but still a major part of the population is excluded from this system. Almost 90 per cent of the population does not access the capital markets and on similar lines a large portion of the markets do not offer any insurance products. There are around 6.5 lakh villages but rural penetration in terms of branches is abysmal, thus presenting a huge untapped market.

Meanwhile, we have seen the entry of private sector banks post 1992 but how many of them have survived till date is a big question. Their entry did lead to public sector banks losing some market share but as of now more than 70 per cent of this market share is still commanded by the PSBs. The reason behind sustaining this market share is that the PSBs are dynamic in nature and experiment and devise products according to customer expectations. Having said this, the new players would still have a huge playground. Also, it is not as if they will impact the other private sector banks immediately because it takes time to stabilise.
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What is your take on allowing a hike in FDI in the banking sector?

Banks need funds to meet the capital adequacy norms and one of the sources is foreign investment. But at the same time one has to take into consideration that the banking sector is regulated across the globe and if you ask me what is the optimum level of foreign capital investment in India, this could turn into a highly debatable issue. Some of the private sector banks have large FII holdings while there is a restriction of 20 per cent for the public sector banks. The PSBs have been requesting the government to allow them to raise more funds from the FDI route and thereby lessen their dependency on the government for capital but it is a policy issue and needs to be addressed properly. 

Are Indian banks adhering to prudential risk management norms followed globally? Is there a need to beef up our risk management?

Banks, per se, are in the business of managing risks. We have seen that from time to time banks have been suffering from inadequate risk management or getting impacted by new kinds of risks. For instance, American banks suffered heavily in 2008 in spite of all their advanced tools of risk management. Interestingly, the Indian banks did not witness the whiplash effect that took place in other countries. That said, I feel that the present risk management tools need to be upgraded. 

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

Well, that’s a tricky issue to talk about. We have witnessed huge pressure on Indian currency over the last few weeks which has led the RBI to tighten liquidity in the market. These are short-term measures and can be reversed once the target of containing rupee volatility is achieved. Therefore, as of now it’s a waiting game. With inflation softening, there has been a move to lower interest rates to push growth in the economy. This is necessary because investments have dipped due to high interest rates. Going forward, once the temporary hiccup in our economy is cured, the journey of softer interest rates will begin again. 

What corrective measures can be taken to reduce non-performing assets?

The banking system acts as proxy to the economy. Any stress in economy affects banks too. To cite an example, the fact that many of the infrastructure projects initiated during the good times have either lost momentum or ground to a halt have impacted those banks that have financed these projects. One of the ways to avoid such pressures is better risk management.

Going ahead, which sector do you think would put pressure on the asset quality?

We did notice some stress in the aviation sector. Also, steel, pharmaceutical, and infrastructure companies are going through a tough phase right now. 

What opportunities and challenges do you see ahead?

The biggest challenge is keep increasing our customer base. But having now expanded across the country, this would be taken care of. The need of the hour is adopt technology and also keep a close watch on the risks associated with advanced technologies.

What are your thoughts on creating value for the bank’s shareholders?

We have strengthened the balance-sheet substantially and profitability has started improving too. All the parameters that a potential investor looks at such as NII, NIM, ROA, and ROE are now much better. The one big task that needs attention is to improve the NPA levels. And that’s something we will achieve very soon.