In an interaction with Dilip Kumar Jain Chief General Manager and CFO, Punjab National Bank

Aiming For Growth With New Strategies

Punjab National Bank is an Indian government public sector bank based in New Delhi. It was founded in May 1894 and is the second-largest public sector bank in India in terms of its business volumes, with over 180 million customers, 10,150 branches and 12,080+ ATMs. In this interview, Chief General Manager and CFO Dilip Kumar Jain highlights the bank’s performance and the way forward

What is your take on the current inflation and interest rate environment and by what time do you see the Reserve Bank of India (RBI) cutting key policy rates?

Globally, headline inflation has remained high though it has decreased on a year-on-year basis. Though a rate cut was announced by the ECB, central banks across the globe like US Federal Reserve, Bank of England and others may keep the interest rates high for a longer period of time due to elevated inflation risks and rising trade tensions. The Indian economy, bolstered by robust fundamentals, is exhibiting strong growth and resilience. The RBI has maintained the key policy repo rate at 6.5 per cent for seven consecutive times to maintain a balance between growth and inflation.

On the inflation front, domestically speaking, a moderation wave has started. In June 2024, the headline inflation rose slightly to 5.1 per cent from 4.8 per cent in May 2024 which may compel the RBI to further adopt a wait and watch approach. However, my view is that the first rate cut may not occur until the latter half of this financial year due to persistent inflation concerns versus the strong growth outlook. The RBI has projected India’s real GDP growth rate for FY25 at 7.2 per cent while CPI inflation is estimated at 4.5 per cent.

Considering the wage revision and other anticipated expenses, how confident are you in achieving the target of 1 per cent return on assets by the end of the next financial year?

With the anticipated improvement in the economic and banking scenario, the bank is hopeful of achieving the 1 per cent ROA by the exit quarter, i.e. Q4FY25. We are hopeful of achieving this through constant improvement in our underwriting, improving NII by adopting new strategies for improving CASA deposit and retail TD, thereby reducing dependence on institutional deposits, etc. The slippages have also been arrested and recovery has been improving over the quarters with recovery being double of slippages.

Thus, there will be lesser requirement of NPA provision as our provision coverage ratio is already at 95 per cent, thereby generating healthier return on assets. The bank is focusing on increasing its low-cost CASA deposits and high-yielding RAM advances, which is likely to enhance profitability. Our establishment expenses are in line with the industry and all the provisions have already been catered for in the last quarter itself when the wage revisions were finalised. The above will pave way for enhanced net profit, giving way to achieving the target of 1 per cent by the exit quarter of FY25.

Looking at the latest GDP growth rate, how do you see the overall credit growth rate for the banking sector and your bank?

Going forward, some softening is expected in GDP growth in FY25, but it is expected to continue as the fastest growing economy of the world. In line with GDP growth, FY25 is expected to witness credit growth but with moderation on account of base effect, revised risk weights, diverging credit and deposits growth and global geopolitical tensions. However, with the pick-up in capacity utilisation and announcements made for the various sectors, it is expected that the bank may see more avenues for credit growth. The government’s continued thrust on capital expenditure will pave the way for more credit demand in the economy.

There have been several announcements in the Union Budget aimed at supporting the MSME sector. The bank has already been focusing on the high-yielding RAM segment. Going forward, the credit demand may remain in range of 12-15 per cent, as estimated by various agencies. Banks may also experience some convergence in deposits and credit growth due to moderation of credit growth. The bank’s guidance for credit growth for FY 2025 is 11-12 per cent versus 11.2 per cent actual YoY growth as on March 31, 2024.

What is your take on the current liquidity in the system?

The banking system in India has shifted to a surplus liquidity position after being in deficit for most of the year. This change is attributed to government spending following the elections and the RBI’s actions. There has been an uptick in foreign inflows into local sovereign debt quickening after the country’s inclusion in a globally-tracked JP Morgan index on June 28, 2024. Further, liquidity is also expected to be comfortable post a lower gross borrowing announcement of Rs 14.01 trillion, down from Rs 14.13 trillion announced at the time of the interim budget. Against this backdrop, the RBI is expected to manage liquidity as per the requirement of the market and the economy and may take appropriate action through its various tool like LAF and durable tools like OMO as it has been doing in the past. As far as PNB is concerned, we have excess SLR of about 4 per cent over and above the regulatory requirement.

Now that the population at large is aware of various financial products such as mutual funds and direct equity, there is a decline in savings deposits in banks. How big a problem is this and how are the banks dealing with this?

Though bank deposits remain a dominant component of household financial assets, the share is on a decline. The awareness of various financial products, such as mutual funds and direct equity, has led to a shift in how people allocate their savings. However, it's important to note that this decline doesn’t necessarily indicate a crisis for the banks. Banks have also experienced growth correlated with population increase, income increase and branch expansion

However, to address this trend, banks are taking several strategic steps like diversifying their offerings, educating customers about different financial products, enhancing digital banking services like user-friendly apps with seamless account management, collaborating with fintechs and focusing on enhancing customer experience. It may be noted that the preferences of savers during the past few years have been linked to growing interest rates. Nonetheless, there may be a steady rise in the growth of savings deposits once the interest rate reversal begins.

How will the bank adapt its strategies to the new investment classification norms and the potential changes in provisioning requirements for project finance outlined by the RBI’s draft circular?

Regarding investment valuation norms, since this new guideline is applicable from April 1, 2024, the investment book was reclassified into HTM, AFS and FVTPL categories and shifting has already taken place. It has remained a positive development as far as reserve and surplus is concerned. Under the new directions, the criteria for triggering impairment in case of investments in subsidiaries and joint ventures have been revised and same will be recognised in profitability if there is a substantial decline in fair value compared to the carrying value for six months.

Regarding project finance, I would say that these are draft guidelines and the RBI issued the paper for seeking consultation advice for all the stakeholders such as banks and borrowers. The guideline is on the basis of risk perception, such as the timely completion of a project, which is under construction. If there is more risk, a bank is required to make more provisions, and vice versa. More clarification from the RBI may see finalisation of the guidelines and we will assess the position after the final guidelines are released. Further, given the healthy balance-sheet of the bank, even if there is provision requirement, it is not expected to dent the bank’s bottom-line and it is to be provided in a gradual manner.

Though bank deposits remain a dominant component of household financial assets, the share is on a decline. The awareness of various financial products, such as mutual funds and direct equity, has led to a shift in how people allocate their savings. However, it's important to note that this decline doesn’t necessarily indicate a crisis for the banks. Banks have also experienced growth correlated with population increase, income increase and branch expansion.