The Potential Of Untapped Domains - Narendra Singh, CMD, Bank of Maharashtra

Interest rates are believed to have peaked and are expected to moderate in the long run. However, the current exchange rate volatility, capital outflows and persistent high rate of consumer inflation are the short-term hiccups which may delay the moderation.

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

Considering the fact that there is a huge gap between the credit requirement and availability in India, the entry of new players in the banking sector is both, inevitable and necessary. In addition to that, about half of the Indian households are not covered by the banking sector. To bring them into the banking fold is a gigantic task. As such, there is ample scope for new banks to operate in the Indian economy.

The entry of new players is expected to increase competition in the market. The competition, as you know, can do wonders in many ways. With an increase in competition, there will be increased innovation in products and delivery channels, and there will be new managerial methods and processes. Thus a managerial and technical revolution is expected to spill over in the industry. The public sector would have to gear up to face increased competition. The entry of new players will result in an increase in credit availability and expand the choice of better services to customers. Moreover, the higher efficiency would decrease the cost associated with banking operations. Thus the entry is going to give a range of opportunities along with many challenges. 

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

As stated above, there is a huge gap in the credit availability and requirement. The gap gets even worse in case of agricultural needs. Any infusion of capital has to be seen through the prism of efficiency and its effects. FDI has a positive relation with innovation and transfer of technology. Further it has positive Balance of Payment effects. Thus as a whole, FDI does have a positive influence on the market. The economy also gets benefited as more capital now can be deployed for the larger welfare of the people.

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

Indian Banks are definitely adhering to the prudential risk management norms being followed globally. The Indian banks have already migrated to the Basel II guidelines and are following the Standardised Approach for Credit and Market Risk and following Basic Indictor Approach for Operational Risk since 2009. 

In order to strengthen our risk management practices further, Indian Banks will have to migrate to advanced approaches for reducing capital requirement, particularly for credit. Moreover, banks will have to adhere to robust practices for strengthening overall risk management.

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

The Indian economy is going through one of the difficult patches in recent times. In the background of a slowdown in economic growth in the developing countries, the investment climate in the Indian economy is not picking up as desired. 

Interest rates are believed to have peaked and are expected to moderate in the long run. However, the current exchange rate volatility, capital outflows and persistent high rate of consumer inflation are the short-term hiccups which may delay the moderation.
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What are the corrective measures that can be taken to reduce non-performing assets? 

The Indian banking industry has seen an alarming rise in non-performing assets in the last two years. The slippages could be attributed to prevailing economic conditions. However, Bank of Maharashtra has been able to contain its gross non-performing assets (NPA) level below 2 per cent of its gross advances even in these adverse conditions.

Banks have to mentor the borrowers on how to weather difficult economic conditions. There has to be a continuous monitoring of irregular loan accounts, and if required, the accounts have to be restructured to enable the borrowers to remain standard. At the same time, banks need to remain vigilant to see that moral hazards do not creep into otherwise healthy borrowers.

The Indian economy is going through testing times. The upheavals being experienced by the countries across the globe have affected the Indian economy too. The growth forecasts have seen downward revision because the industry and service sectors have shown very sluggish growth. Reserve Bank has projected a loan growth of 15 per cent for FY 2014. Revival in loan growth may come from the retail segment. If certain nagging issues pertaining to the infrastructure sector are sorted out, new projects will come us and demand for credit will go up.

Going ahead, which sector do you think would put pressure on the asset quality? How are you handling the demand in these sectors? 

The infrastructure sector is the most severely affected sector as a result of the economic sluggishness. Even though the government is trying to address various issues pertaining to the sector, problems still persist. Cash flows in the existing projects have got seriously affected. However, with regard to the accounts which are already in stress, we are either going for restructuring or to Corporate Debt Restructuring (CDR). 

What is your outlook on how Bank of Maharashtra will fare on key financial metrics such as NIM, CASA and NPA by the end of FY14?

Bank of Maharashtra has one of the best CASA ratios in the industry. However, with the high growth path that the bank is following, maintaining more than 40 per cent CASA would be a big challenge. It would be more so in the declining savings to GDP ratio being witnessed by the economy. Yet our bank would definitely have a higher CASA percentage compared to peers.

Bank of Maharashtra had a NIM of 3.10 per cent as on March 31, 2013, which again is one of the highest in the Public Sector Banks’ group. The margins though are likely to come under pressure in the current year and the bank expects to have a NIM of around 3 per cent in FY14 as well. 

Non-performing assets are likely to increase on account of prevailing economic conditions. Even then the bank has a robust recovery mechanism in place to keep NPAs within reasonable limits. I expect gross NPA ratio to remain below 3 per cent.
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What is your outlook on loan book growth for FY14? Which are the sectors that will spearhead this growth? 

The Indian economy is going through testing times. The upheavals being experienced by the countries across the globe have affected the Indian economy too. The growth forecasts have seen downward revision because the industry and service sectors have shown very sluggish growth. Reserve Bank has projected a loan growth of 15 per cent for FY 2014. Revival in loan growth may come from the retail segment. If certain nagging issues pertaining to the infra- structure sector are sorted out, new projects will come us and demand for credit will go up. Corporate sector is least likely to augment investment in the near future with new projects. 

The numerous policy measures announced by the government are likely to prove positive but their impact would be felt in medium term only.

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

As in many other areas of the economy, opportunities and challenges come hand in hand in the banking sector also. However, for the sake of simplicity we take the liberty of putting things in compartments. As far as opportunities are concerned rural banking is going to come in a big way. An untapped source of business is there to get explored as we know that there is a huge unmet need for banking business including credit there. Next, technology is going to help developing new products and delivery channels. The early mover would definitely reap the benefits. Thus, technological development is going to open flood-gates of opportunities of growth.

The foremost challenge is to develop profitable and need-based business models for the rural areas. Second, ‘infrastructure bottlenecks’ in the rural areas are one the most important challenges to be met. Third, raising adequate capital to back high business growth in the light of Basel III requirements will be a challenge. Fourth, building the required competency level in the young employees being recruited by all public sector banks to take the place of retiring employees is a herculean task. 

At the same time, all existing banks will have a difficult time in retaining talent by reducing attrition, when new private banks start functioning. 

What are the specific challenges in the rural areas?

Rural sector presents an untapped domain, more specifically in the light of rising rural incomes on account of the limited land supply. Rural areas are predominantly agrarian with different and seasonal credit requirements. The products thus have to be designed to cater to their specific requirements. Right products can be designed only after trial and error methods of ascertaining the credit requirements and repayment capacities of the borrowers. 

What kind of potential do you see in the online banking business?

The online banking business presents a very convenient and time saving option to the country, which is witnessing the fastest growing young population at present. The Gen-X is waiting to explore and lap up online facilities being/to be offered by the banks. Thus the potential is huge, provided we are willing to cash on it. 

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

More profitable the entity; more would be the wealth generation for the shareholders. Our bank is making all the efforts to come up to the expectations of its shareholders. 

In addition to increasing business, the bank’s focus will also be on increasing our bottomline considerably as per our trend in the recent past.