Entry Of New Players Will Help Indian Banking Improve - H S Upendra Kamath, CMD, Vijaya Bank

H S Upendra Kamath
CMD
Vijaya Bank

The recession and economic downturn has not completely subsided. This poses a challenge to the banks to show the desired level of growth as many vital sectors are showing low growth.

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

There are 26 applications for new banking licenses pending with the RBI. Although, this number provokes many questions as to what is going to happen in the Indian banking sector, the picture is still hazy. In any case, there are also indications and speculations that the actual number of banking licenses that would be issued will be in the range of 6-10. Whatever it may be, it is certainly a significant development in Indian banking.

Obviously, the question also presupposes that there will be increased competition, which is true. With customers already over-pampered, this widens their options further, thereby forcing the existing players to improve the content and delivery efficiency of their products. So, while the customer will be the ultimate beneficiary of this development, it need not necessarily affect the existing players too much.

First, banking in the country offers vast untapped potential even today. Penetration of banking services, especially in the rural areas, is yet to happen in a big way. Therefore, I firmly believe that there is still space for more players in Indian banking and all of us can coexist with healthy competition. 

Secondly, the existing players, especially public sector banks, have become stronger now. Technologically they are on par with any other bank. Risk management has taken root in PSBs. Best practices and systems, prudential norms, adherence, compliance, transparency and disclosure have made them capable of weathering any storm. Public trust in them is high even now.

Further, to be resilient in the market conditions, many of them have successfully implemented business process re-engineering to improve their functioning. With a reasonably decent pay package, excellent growth prospects and security/stability in employment, they are attracting quality and talent from the job market too. It should also be remembered here that when all the above factors were at a virtually absent or in nascent stages in the 90s when the economy was opened up and new generation banks made an entry, the PSBs still withstood the competition. So, I see no reason for any threat to the PSBs. 

The only plausible development I foresee is the likely consolidation in the sector in order to make some of the existing players fundamentally strong to face challenges. Such developments may happen in the private sector sooner but may take some time in the public sector in view of the structural issues involved. Overall, in my opinion, the entry of new banking players will only help streamline, stabilise and improve Indian banking.
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What is your take on allowing a hike in FDI in the banking sector? 

It is for the government and the RBI to decide whether to allow further FDI in the banking sector, and if so, to what extent. As a banker, I welcome capital in the Indian banking sector in view of impending implementation of the Basel III guidelines, which necessitates substantial infusion of capital. 

Banks in India may require additional capital of upto Rs 2.6 lakh crore by 2018 as they migrate to the capital intensive Basel III framework, as estimated by Standard & Poor’s. Nearly 70 per cent of equity in PSBs is contributed by the Central Government. Definitely, contributing the proportionate amount of additional capital by the government is a huge task. So, capital from all avenues is welcome.

FDI is also beneficial from the point of view of easing pressure on the falling value of the rupee. Under the circumstances, it is tempting to state that FDI in banking is a welcome initiative. However, allowing FDI in Indian banking involves many other issues too, besides the immediate need for capital. The government will consider all these vital aspects before taking a final view in this issue.

Are Indian banks adhering to prudential risk management norms followed globally? What are the steps we need to take to strengthen our risk management? 

Yes, Indian banks are currently adhering to prudential risk management norms as prescribed by the RBI. These guidelines are based on the globally accepted Basel guidelines.

The Indian regulator has implemented much stricter norms than those globally followed. As is evident from the Indian regulator’s past versions of the global prudential norms, the capital to risk weighted assets ratio (CRAR) recommend by the RBI for Indian banking (nine per cent) is higher than that globally recommended (eight per cent recommend by the Basel Committee). The same stringency can also be observed in the capital ratios prescribed by the RBI under Basel III Capital Regulation guidelines. (5.5 per cent of common equity for Indian banks against the 4.5 per cent recommended by Basel III)

Further, to strengthen risk management in Indian banks, the RBI has prescribed early timelines for implementation of Basel III norms as compared to their global counterparts. The cutoff date for implementation is March 2018 in India against December 2018 as recommended by Basel III.

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

The softening inflation, both WPI and CPI, had allowed the RBI to bring down the repo rates slowly and steadily, which was putting lot of pressure on commercial banks to reduce the lending rates. In my view, repo rate cuts alone cannot be a driver for base rate cuts. The base rate is a function of the overall cost of funds of banks. But, the RBI’s monetary policy initiative is indeed a signal to the banks. Hence some banks have already announced rate cuts and others were thinking of following suit. 

However, the sudden, sharp and continued fall in the value of the Indian rupee had made the RBI act fast in initiating steps to curb rupee liquidity, thus resulting in an increase in the short-term interest rates. This has put the clock somewhat back, with problems surfacing on the liquidity front and interest rates hardening in the inter-bank and money market. So, further softening of interest rates would be possible only after stability in rupee value and easing of liquidity issues. If inflation does not shoot up further, the chances of interest rates softening cannot be ruled out in the busy season ahead.
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What are the corrective measures to reduce non-performing assets? 

First and foremost, we should keep in mind the age-old adage ‘Prevention is better than cure’ and attempt to obviate the very possibility of assets slipping to the NPA category. This calls for concerted monitoring of standard asset accounts. 

A prudent banker will adopt single or multi-pronged strategies involving either any one or more of the above referred avenues as corrective measures to reduce non-performing assets.

Can you share your expectations on how your bank would fare on major financial matrices like NIM, CASA and NPA by FY14 end? 

The quarterly NIM of our bank for the last quarter of FY13 was at 2.21. It started from 2.41 for the corresponding quarter of previous year and slipped progressively to 2.14, 2.10 and 2.08 in the subsequent quarters. During the entire year, the net interest income was under stress due to higher deposit costs and a large portion of advances to PSUs being at the base rate. However, we expect to maintain the level of NIM in the current fiscal in view of the likely improvement in treasury interest income and shedding of bulk deposits, leading to lowering of cost of deposits.

Current Accounts and Savings Accounts (CASA) is one area of concern for our bank. Traditionally, it has been our tendency to rely on bulk resources as a trigger of growth. As a result, the improvement in CASA has not been keeping pace with the increase in total deposits, resulting in a declining CASA percentage. At present, the CASA has dropped below 20 per cent of the aggregate deposits, although there is some improvement in the SB deposits. Our immediate aim is to take it above 20 per cent and subsequently to a respectable level of 21-22 per cent by the end of FY14.

In NPA management, our bank has done exceedingly well by containing the NPA stock within a reasonable level with substantial reduction, while most banks have shown increase in both absolute and percentage terms. For the year ending March 2013, the Gross NPAs of the bank were at 2.17 per cent and Net NPAs were at 1.30 per cent as against 2.93 per cent and 1.72 per cent for the previous year. We aim at reducing this further to one per cent as per government directives.

What are the opportunities and challenges for banking sector players going ahead? 

In terms of opportunities, the rural sector still has many things to offer. For one, infrastructure still has huge potential. The thrust by the government to improve roads, modernise airports, improve urban infrastructure, etc. offers large scale avenues to banks for business expansion. 

The card business is picking up at rapid pace. All payments and settlements are now steadily coming under the electronic mode. This offers a great opportunity for banks to leverage their IT initiative in building new avenues for business growth. 

New dimensions are being added to the fee-based income of banks as the opportunities to expand this area are growing. Tie-ups with insurance companies are the order of the day. 

It is expected that with the value of rupee depreciating steadily vis-à-vis the US dollar, more foreign inflow is expected. While, the opportunity to build up the NRI deposit portfolio is immense, inward remittances are expected in large amounts in the real estate segment. This too offers plenty of opportunity to banks to finance this segment, both in wholesale and retail.

As regards the challenges, the likely emergence of new banks is the latest and greatest one looming. With the RBI shortlisting the names of new bank aspirants, there is a likelihood of at least half a dozen new banks entering the scenario, which will intensify competition for the existing banks. 

The recession and economic down-turn has not completely subsided. This poses a challenge to the banks to show the desired level of growth as many vital sectors are showing low growth. 

Asset quality continues to be under stress, with many units not doing well. Nurturing the units financed with timely doses of credit and supporting them during times of crisis in the backdrop of stringent classification and provisioning norms and restructuring guidelines is for a test for banks.
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Implementation of Basel III is the biggest challenge lying ahead for Indian banks. While, they are adequately capitalised as of now, Indian banks are estimated to need additional capital of Rs 2.6 trillion to meet the Basel III guidelines. It is a huge task to raise such an amount of capital either from the markets or from the government sources in case of PSBs. 

There are also challenges on the human resources front, especially in the areas of a greying workforce, significant attrition and retention of talent in view of emerging new banks. 

Do you see more unlocked potential in the rural sector? 

I firmly believe that the rural sector is the next growth trigger for Indian banks. Despite banks already making deep forays into the rural areas, there is still lot of space for them there. 

A World Bank study has revealed that nearly two-thirds of India’s 120 crore population still live in rural areas. Also, since 2000, the GDP has grown faster in rural India than in urban India (6.2 per cent CAGR as against 4.7 per cent). Thus, we can imagine the magnitude of unlocked potential in the rural areas. However, to tap the same effectively, bankers have to face many challenges like:

• Creating banking awareness.
• Reaching the masses, given the sheer size of villages.
• The large volume of small value transactions, which should be optimally and remuneratively used.
• The high cost of technology in reaching out to rural areas.
• Low level of profitability and high cost of operations.
• The natural uncertainties that impact agriculture.

Finally, what are your thoughts on value creation for shareholders? 

For me, value creation for share-holders is by way of improving the fundamentals and the working of the bank. On various occasions, we have emphasised that our job in the bank is to ensure improving the working of the bank and show better results.

No doubt, share price is one of the glaring factors to attract the attention of investors and shareholders, and we are also aware of the market and investor sentiments about performance of shares of our bank in the stock market. We firmly believe that the current ruling price is well below its potential. But it is also a factor and the reality is that share prices are determined by a host of other factors on which we have no control. So, our job is to do what we can do, i.e. improve the working and fundamentals of the bank, and the value for shareholders will be created from this.