Opportunities And Challenges In The Banking Industry - M Narendra, Chairman & Managing Director, Indian Overseas Bank

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

The entry of new banking players may not bring a drastic change in the banking scenario in the country. However, they will be starting to make a perceptible impact. The advantage for these new players may be that they will be able to commence their operations with the support of state-of-the-art technology. By using the latest updated product, they will be able to offer niche products, having an edge over other competitors. Public sector banks will continue to have the advantage of the broad network of branches and ATMs across the country. But, the new banks may also plan to increase their presence in rural areas. Hence, I feel that the new banking players may not be an immediate threat to other existing banks. However, in the long run, they might be giving good competition for others. This will compel all banks to continuously innovate and improve their performance.

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

In the midst of a policy easing cycle, the RBI has taken stringent liquidity tightening measures since July 15, 2013 to bring stability in foreign exchange markets. The fear of the tapering of QE3 by the Federal Reserve has already resulted in large scale withdrawal of investments from bond markets across the globe and emerging markets are facing severe strain on their weakening currencies. In the case of those countries with large CAD like India, the pressure is more to protect the speculative onslaught. 

The liquidity tightening by RBI has already reversed the interest rates, both in the short term and long term, to harden substantially since the middle of July, 2013. Under these circumstances, the CAD in the coming months, along with the stability in foreign exchange markets hold the key for exact timing of reversal of liquidity tightening by RBI and further policy easing. We expect that the situation is likely to improve rather slowly and interest rates are expected to come back to their earlier trajectory only in the end of third quarter and last quarter of the current financial year 2013- 14, subject to markets coming in terms with the Fed tapering. 

Are Indian banks adhering to prudential risk management norms followed globally? 

Banks in India were following Basel II guidelines for measurement of various risks in banks and maintaining capital. With effect from April 01, 2013, the RBI has advised banks to follow Basel III guidelines. RBI guidelines are more stringent with respect to the maintenance of minimum capital requirement. Indian banks are also advised to frame Internal Capital Adequacy and Assessment Policy (ICAAP) for the maintenance of capital for risks, which are not covered under Pillar I. Indian banks are advised to move to Risk Based Internal Audit (RBIA) system for auditing the branches. These are some of the best practices for risk management which are followed globally.

Presently, Indian banks are using ‘Standardised Approach’ for credit risk & market risk capital measurement and Basic Indicator Approach for measuring operation risk capita. Indian banks have to strengthen their IT System and take steps to collect the data, which are required for migration to advanced approaches. Indian banks should strive to move to advanced approaches as they would reflect the actual risks of the bank. 
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What is your expectation on how your bank would fare on major financial metrics such as NIM and CASA by the end of FY14? 

We have projected our Net Earning Assets to grow at 12 per cent with a business growth of 14.6 per cent. Due to a continued slowdown in the economy, major constraints such as interest spread, delinquency in assets portfolio, and huge provisions would give stress to the bottom-line profits in the near quarters. However, the bank is taking serious efforts to protect and maintain the NIM at around 2.50 per cent by March 2014. Major efforts in achieving this include cost control as well as recoveries. Due to our conscious shedding of bulk deposits, reducing the percentage of bulk deposits to 12 per cent, the cost of deposits was contained at 7.80 per cent during 2012-13.

As far as CASA is concerned, the bank is implementing a multi-pronged strategy to increase the CASA base, which includes fast expansion of branch network with more focus on rural and semi-urban centres. It is noteworthy to mention that we have opened around 900 branches over the last 3 years which improved the CASA substantially. The CASA percentage in these new branches was around 45 per cent. However, mobilisation of CASA deposits poses a great challenge to the entire banking sector in the present economic scenario. As such our CASA ratio would be around 27 to 28 per cent by March 2014, in line with the expected level of 19 banks’ average of 28 per cent for the current year.

As a banking sector player, what are the opportunities and challenges going ahead? 

The major opportunities are liberalised economic policies, unstinted support from the government for augmenting capital infusion, financial inclusion and Direct Benefit Transfer (DBT), which offer a viable business opportunity, technology driven products, entry of young force into the banking sector etc. On the other hand, the challenges left over us are a competitive market, inflationary trends, higher Current Account/Fiscal Deficit, rupee volatility, increased operating expenses and reduced interest spread due to higher NPAs and restructured advances. As the economy is going through a slow pace, it would take little more time to stabilise. 

Young India is one among the prominent opportunities in front of us. We would like to tap this market and year 2014 has been christened as the “Year of Youth”. We would come out with exclusive products catering to their needs. They would be our fuel for growth in crossing many milestones. 

As said earlier, the bank is taking steps in cost-cutting exercises, apart from improving the incremental yield on new advances. Further, recovery of NPAs would definitely help improving the bottomline, apart from improving the fee-based income, with 20 per cent growth in the current market scenario. 

What are your thoughts on value creation for shareholders in the banking industry?

Our bank came out with an Initial Public Offer in September, 2000 with a face value of Rs 10 per equity share. A Follow-on Public Offer was offered at a price of Rs 24 per share (Rs 10 face value and a premium of Rs 14) per equity share in the year September, 2003. Against the face value of Rs 10 per equity share, so far we have paid a sum of Rs.36.80 per share, by way of dividend to our shareholders. This means investments by original investors’ holdings have tripled in 13 years, which we feel is a very good wealth maximisation. 

The trend in the value of the bank’s shares is in line with the other banks’ share movement. Due to the volatility in stock markets, there have been occasions when the price spiked, benefitting the shareholders who were willing to offload some shares.

After recent developments in the Indian financial sector/economy, we note that our bank’s shares are traded well above the issue price whereas in the case of some of the other public sector banks, who had issued shares with high premium, their shares are trading below the issue price. 

Though our shares are traded at a discounted price in comparison with our book value (which stood at Rs.119.05 as on June 30, 2013), we still find that every week, our customer base is increasing.