Indian Bank has seen muted growth in its business over the last 10 years. This has, however, turned out to be a blessing in disguise when compared with peers in terms of bad loans. In an interview, Kishor Kharat, who took over as MD and CEO this financial year, talks about the bank’s plans to improve business performance and the larger issues faced by the industry.
What is the NPA (non-performing asset) situation for Indian Bank, given the overall concerns in the sector?
Our net NPA is at 4%. Today, in the entire industry, the NPAs are at a very high level, particularly when we compare with the [other] public sector banks. In the private sector, the gross NPAs are less than 5% and the net NPAs are at 3%. Within the public sector, we have the lowest NPAs. So, when we compare with public sector banks and if you take the average of the banking industry as a whole, our NPAs are lower. So, this appears to be a good position as of now. There are not many concerns about NPAs for us, and most of it is within control.
Is there any reason for the lower level of NPAs?
We have seen muted lending growth in the last ten years. In the last three years, our credit growth was less than 2% and prior to that period also, the lending growth was not much. Particularly, we have not done much in corporate lending, which has seen the maximum stress. But that has turned out to be a blessing in disguise for us. We are attempting to bring down our gross NPAs to below 5% or at least in the range of 5-5.5% from the current level of 7% and net NPAs to less than 3% from current level of 4%, which would put us in a good situation.
Despite a good position on the NPAs front, the bank’s business growth has been muted. What are your plans to improve this?
We have taken a strategic decision to grow in line with the industry. Earlier, when the industry was growing at 12-14%, our bank was growing at 1-2%. We have kept a target of total business growth of ₹3.6 lakh crore for 2017-18. The medium-term plan is to hit business of ₹6 lakh crore.
From 1-2% to 14% growth, seems a challenging task. After you took over, what key messages have you given to your staff to achieve the target?
In 2005, our comparable peer group such as Bank of Baroda, Punjab National Bank and others had the same level of business like us. But now, Bank of Baroda has a total business of ₹10 lakh crore and Punjab National Bank ₹9.5 lakh crore. Even Canara Bank, which used to do lesser business than us, has overtaken us.
This was a key message to our staff. We have also noticed that the career progression was not happening here. Bank of Baroda now has 46 general managers when compared with 18 in 2005. But in Indian Bank, it has grown to 18 from 16 in the same period. All these were highlighted to the staff.
Is that message getting reflected in the numbers?
Yes. Our credit growth in the first quarter was 5%, which is better than in some of the previous quarters. The first quarter is considered to be a muted quarter for the industry due to various issues such as financial closure, internal transfers and promotions. I expect the momentum to be stronger in the second quarter.
One more trend we have seen in our bank is that every time our business hit ₹3 lakh crore by March, there would be a drop post that. But, for the first time, post March our business has hit ₹3.25 lakh crore. By December, we should hit our target which will result in 14% growth. This would be unprecedented for the bank. I am sure once our business hits ₹5 lakh crore in the coming years, things would be on auto-pilot mode.
With low demand for credit from corporates , which segments are driving growth?
Retail, agriculture and small and medium enterprises segments — which we call as “RAM” segment — are driving the growth for us. We expect each of these to grow by 20%. Also, a lot of banks are going through prompt corrective action measures. Even though these banks have good clients, they are not able to fund the growth of good clients due to capital constraints. Those kinds of customers are coming to us for their growth needs. Also, due the merger of State of Bank India subsidiaries, customers of these subsidiaries are also coming to us.
They are also not concerned if the interest rates are higher by 50 basis points. We are seeing aggression in this and would tap this client base on a qualitative basis.
Despite RBI cutting rates, banks are not passing on the benefits to the customer. Why?
There is always a lag between deposit rates and loan rates. I might announce a deposit rate cut immediately. However, some of my deposits are locked at higher rates already. Only when they come for repricing can I revise the rates. So, there is an asset-liability mismatch, which results in a lag in transmitting the benefits of lower interest rates to the borrower. Also, today, most banks have ample liquidity and don’t find a need to borrow funds. There is also pressure on banks due to lower net interest margin in the range of 2-3%. And, their profitability is under pressure due to higher NPAs.
So, there is not much leverage to cut rates. Today, since there is no demand for credit from corporates, even if interest rates are passed on, there would not be much benefit. On the retail side, home loans are the major driver. Even there, things have come to a standstill due to demonetisation, implementation of RERA and GST.
People are on a wait-and-watch mode in real estate.
What are your views on the bankruptcy code?
If the code is used for resolution mechanism, it would be very successful for the economy. The RBI has come out with many tools for resolution of NPAs, but those have tasted minimum success.
Bankers were worried about taking resolution decisions because they feared that those decisions would be questioned later. Now, they have the option of legal cover in the form of the code. If it is resolution mechanism, everybody wins. If it is liquidation, than everyone loses. Is the bankruptcy code infrastructure sufficient to handle increasing case volumes? How protected is the channel from other legal remedies?
These are the questions now. We have seen instances of High Courts staying orders. So, the mechanism should be protected from any hindrance and should be taken in the right spirit. Otherwise, we will see delays as in the case of Sec. 138 on bouncing of cheques and the Sarfaesi Act.