Strong Balance Sheet Potion To Create Shareholder’s Value - K Venkataraman, MD & CEO, Karur Vysya Bank

The standards of risk management can be raised only if individuals banks invest and get in to the analytics and also bring in requisite software. Also, in the banking system as a whole, there is need for all the banks to pitch in together to put in place a system where the interbank transactions are done safely on the operations risk side.

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

As regards private sector banks, I don’t think this is necessary, as we already have upto 74 per cent FDI therein. Thus, I don’t think there is any need of increasing FDI here. However, the majority of Indian banks are public sector banks, in which the government holds a higher stake. There is some doubt that enough capital can be found with the government to support these. So, I would say that lack of FDI in the banking sector is a constraint for raising capital for the PSBs. 

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?

I would say that the regulator has ensured that we all are moving to the global standards. In fact, all the banks are following the required level of risk management but there is no finality as new risks keep coming up. Risk that is arising at various points of time is varied, so we need to continuously watch those. All banks have a structured risk department to look at credit risk, operations risk and market risk. 

With the huge technology in place, operations risk is rising. The standards of risk management can be raised only if individual banks invest and get in to the analyticals and also bring in requisite software. Also, in the banking system as a whole, there is need for all the banks to pitch in together to put in place a system where the interbank transactions are are done safely on the operations risk side. 

I would say that the regulators should ensure that risk management practices are standard and that we reach the levels of advanced countries. 

The risk management practices and measures we have are suited to the Indian conditions. The operations risk is very high in the country, as a lot of cash transactions take place. There are certain peculiarities in the Indian market, and the RBI has modified the risk management standards to suit these. The risks are rising every day. 

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

That’s like trying to gaze into a crystal ball. We never anticipate such a sudden rise in the short-term interest rates and liquidity tightening. Maybe this was warranted because of the very special circumstances at this time. Though these are temporary measures, the point is how short term they are. They may extend upto September or the beginning of October 2013. Depending upon how the monsoons fare and how the rupee responds to all these measures, the RBI could take a call in the next credit policy, though I do not expect a rate cut. The interest rate can soften if the liquidity situation improves.
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What are the corrective measures to reduce NPAs? 

There are very limited options available with the banks. Most of these are private assets and larger corporates who are operating in the various sectors. In India, most of these companies are highly leveraged. We have allowed this system to go on like this because of the model in India that we are following. Obviously, this is what happens in tight situations where the growth has been continuously declining and the demand is contained. Due to the containment of demand for a long period, the companies are not in a position to generate enough cash. So, if it is their own money, they will always reduce their margins and manage to keep afloat. In loan cases, there is no alternative, and these companies will have to default in many cases. 

This is the prevailing economic condition. I would say the banks are little slack in assessing the credit risk and doing anything of any sort. Now, I would say that they have to check the viability of the companies which may need restructuring. Unless we do some rescheduling and restructuring, it will be difficult to sustain this.

Of course, if all banks go into recovery mode, it will be difficult to the industries to survive. Restructuring has been continuously on the rise, although there are very heavy disincentives for the banks to restructure the accounts. But practically, if units have survive the tough times, they may need to take such a call. 

The learning in the entire situation is the banking system as whole should not allow high leverage operations. We should have a proper cash flow structure for funding big projects. There should be a bond market. The development financial institutions need to be fostered, as these can develop models for long term funding. 

Please give your expectations on how the bank would fare on financial matrices like NIM, CASA and NPA by FY14 end?

Our NIM is around 3 per cent and we would like to keep it around 3 per cent. The moment we make it 3.5- 4 per cent, i.e. start chasing higher returns, we may take high risk assets which will prove to be very difficult in the future. So, we would like to go for higher quality and maybe lower yielding assets to keep our asset quality intact. Our NIM would be around 3 per cent. This can be under pressure if the costs of funds may go up if the RBI continues the current measures for longer period. Our CASA percentage is about 19-20 per cent and we propose to keep that percentage at that level only. Our net NPAs were 0.35 per cent last year and would be remaining at 0.3-0.5 per cent, we propose to keep between this range only.

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

We think that the loan book growth would be 30-40 per cent because our base is very low, in fact we are not a very large bank. The large banks will be able to grow may be around 20-25 per cent. Sector wise we are not focusing on any particular sector. We want to diversify the risk and will be looking at any sector but obviously we will be going slow to infrastructure sector. 

Finally what are your thoughts on value creation for shareholders? 

Value comes from the strength in the balance sheet. That can stand the bank in good stead at any time and in any situation. If we can retain our customers at any time after meeting competition and growth in the balance sheet without comprising the asset quality, value creation automatically happens.