Mumbai: M.D. Mallya, chairman and managing director of Bank of Baroda, says investment proposals continue to come from corporate borrowers but the pace has slowed. The pipeline of sanctions is strong and may last for one-and-a-half years, but after that the impact of the slowdown will be felt, according to Mallya, who is also chairman of the Indian Banks’ Association, the bankers’ lobby.
In an interview, Mallya said the asset quality of banks is under stress because of rising interest rates and there are pain points in some industry segments. Edited excerpts:
As chairman of the Indian Banks’ Association, you have asked the Reserve Bank of India (RBI) for a pause in monetary tightening despite persistently high inflation.
Balancing act: Bank of Baroda chairman and managing director M.D. Mallya. Photo: Abhijit Bhatlekar/Mint
No, I would rather put it this way—we have informed the RBI that we have seen inflation reigning high in the recent past and, therefore, the action initiated by the regulator has been on the right lines. But in the recent past, we have seen the growth coming down substantially. We were only analysing the overall situation— where does the growth stand and what’s the general perception as far as the market is concerned. One thing is very clear. The overall investment climate and sentiment do not appear to be very high. The investment decisions by the corporates as far as the new projects are concerned have slowed down. In a way we have informed the RBI of the ground realities without commenting on what exactly the regulator should do.
There is nothing wrong in commenting on the current situation. What should RBI do?
One would like to see that inflation is controlled, but not at the cost of growth. Perhaps going forward one could see the inflation numbers coming down probably on account of the various policy initiatives which the RBI has taken. There is always a lag between the action and the result.
I am of the view that one could see headline inflation coming down. The estimate at this point in time is that by March 2012, the inflation could come down to around 7.5%, give or take 25 basis points here and there. That is one scenario. Coupled with that, the present estimate of the GDP (gross domestic product) growth of around 7.5% to 7.75%, even in a worst-case scenario, I think there is a reasonable balance between growth and inflation.
So, RBI shouldn’t go for yet another rate hike at this point?
Let me put it in a different perspective. In a scenario where the interest rates are reigning high, we transmit the increase in the interest rates to the customers and there is this pain and stress as far as the customers are concerned. May be it is felt more so in the case of SMEs (small and medium enterprises) or retail customers who would have difficulties in meeting the interest payments. Having said that, let us also say that the banks have not passed to their customers the last rate hike. We have absorbed the increase in the resources cost. It’s a balance between the demand, growth and the requirement.
Why didn’t you pass on the interest rate burden? Aren’t you now coming in the way of transmission of monetary policy?
It is not exactly like that. Ultimately, the interest rate also is a function of the credit demand and the resources. As of now, the liquidity has been reasonably good. We are not seeing much of a credit demand. There was no need for us to immediately pass on any increase as far as the lending rates are concerned. As far as the depositors rates are concerned, I think there has been a marginal peaking of that on the higher side and I would still feel that banks are operating cautiously, in terms of passing on the interest hike or maintaining the overall balance.
Even on earlier occasions when you passed on the hike, you tweaked the spread between the base rate to ensure that the customers are not affected.
I would say that it’s a factor of the liquidity and the demand. It’s a question of ensuring that the proper deployment of funds does take place. The pricing depends on various other factors, including the credit rating and, by and large, bankers are following these principles.
Which one is more challenging—slowing credit demand or asset quality deterioration?
When we pass through the phase of interest rates increasing, there would obviously be a stress on assets. Today when we say that the asset quality is under stress or there are pain points in some segments of industries, it is obviously on account of the consistent rise in rates. The asset quality could be a challenge for the banking system. Let me also say that the overall gross NPA (non-performing assets) numbers are still very reasonable at about 2.3%. Even if one looks at a slight increase in the delinquencies, the banking system is in a position to absorb these incremental delinquencies. I would still say that we are on a safe ground, we don’t anticipate the overall asset quality to deteriorate so much that one would press the panic button.
How severe is the slowdown? No new investment proposals coming to your table?
Investment proposals do come but they have slowed down considerably. They could be around 40% of what it was in the last year. But then, at this point in time, if one sees the credit growth, it is primarily on account of disbursement to various projects which are under implementation; the pipeline of sanctions has been quite strong and for sometime now, may be for the next one or one-and-a-half years, one has sanctions which will get disbursed. You may not see a substantial reduction in credit growth beyond what you have seen now. A growth of around 18% to 19% for the next one year should not be too difficult. But the point is, if fresh investment decisions are not taken, going forward beyond the next one-and-a-half years, one would see the impact.
Would you blame high interest rate for fresh investment decision not being taken or are there other issues as well?
Obviously there are other issues. Interest rates cannot be the sole reason for the overall economy slowing down. The investment climate has not been very good. From the fiscal side, one would like to see some reforms for development happening which could create a conducive atmosphere in terms of investments. The uncertainty which prevails today in certain segments may have to be removed.
In the June quarter your credit growth was 25%, much higher than the industry average.
If you look at the last two to three years, we have been growing at about 2% to 3% above the industry average growth. I think the leadership in terms of growth in acquiring market share would continue. That’s on account of (a) few initiatives which the bank has taken in terms of segmentation, creating centralized hub for credit origination, among others. This has started paying dividends
Will you continue to have 25% credit growth for the rest of the year?
If the industry growth were to come down, as we have seen in the recent past, our credit growth also could come down…but still I would feel that our growth could be slightly better than the industry growth.
If the industry were to grow at about 18-19% in the current year, Bank of Baroda would like to grow about 22-23%.
Your international business is growing faster than your domestic loan book. While globally banks are not growing, you are growing overseas.
One needs to understand the business model. Our international business is primarily related to the Indian trade and finance. Our portfolio of international business consists of buyer’s credit, almost about 25% which is fully secured by the Indian public sector banks. May be about 15% to 20% of trade finance, a portion of syndicated loans or project loans for acquisition is given to Indian corporates operating abroad, and ECB (external commercial borrowings) funded to Indian corporates. The local assets which are acquired by the bank could form only about 15% of the total portfolio. My international business to that extent is a proxy of what happens in the Indian domestic economy.
Globally, banks are very wary of giving credit. I am told that you have accumulated some NPAs in some real estate exposure in Dubai.
I do not have any significant presence as far as the real estate segment is concerned in my international portfolio in Dubai and elsewhere and my NPAs do not have any real estate NPAs to start with.
My overall NPAs as far as the international business is concerned is much lower than what we have in the domestic business. A gross NPA number of around 0.7%, a net NPA number of around 0.45% are as impressive as my domestic performance.
My entire business model as far as international business is concerned revolves around Indian trade and finance and I do not have much difficulty in monitoring these advances, nor in understanding the business model of these borrowers. Notwithstanding whatever the crises which one sees in Euro or in Dubai, the portfolio Bank of Baroda has strongly grown.
So there is no stress whatsoever.
Absolutely not, I don’t think there is any stress at all.
You are the most aggressive banker in the public sector when it comes to growth of assets. When it comes to non-performing assets, you are possibly the lowest. How do you manage this?
I would put it for two-three reasons. We have been prudently aggressive. The initiative which we have taken for credit marketing and the quality aspects of credit marketing have contributed to the quality of assets. For example, we did segmentation as far as the lines of business is concerned much before any other bank started doing it. We have built in specialization around each of these segments and it has started paying results.
We have not lost opportunities that were available but at the same time we have been very cautious as far as the credit origination is concerned. Coupled with this, a very strong credit monitoring mechanism ensures the right follow-up mechanism for the small-ticket advances.
The bulk of your new assets is coming from the SME segment, which is under stress because of the slowdown and rising rates.
By and large, our growth in credit is equitably distributed —among all the lines of business, right from rural to retail to SME to corporate segment. The growth in each of the segment has been uniform, may be between about 22% and 25%.
What kind of exposure do you have to the infrastructure sector?
As of now, in terms of outstandings, it’s about 8.5% to 9%.
And the power sector? That’s one area people are a little wary about.
May be 50% of that could be power sector, but again within the power sector, there are various segments. For example, it could be for power generation, power transmission, power distribution; and again within the power (sector), it could be hydro, thermal, solar and things like that. For each of the segment, there are sectoral caps and we meticulously ensure that we don’t breach any of the sectoral caps which have been approved by the board.
Are firms asking for loan restructuring?
Loan restructuring or rehabilitation packages is a part and parcel of the credit mechanism which we have put in place. Restructuring is not taboo; it is done whenever a company comes in with a request. The basic point which one would like to very clearly understand is whether the unit continues to be basically viable. All basically viable units which have sufficient cash generating capacity to service the loans would certainly be taken up for rehabilitation.
Are there more instances now because of the stress?
Maybe, little bit more to the extent one has seen in the restructuring being done in the recent past…
In which sector do you see the maximum stress?
A couple of sectors I would say—steel and textiles. Real estate obviously has also been passing through difficult times, but my exposure to real estate has not been significant and I don’t have much of a stress as far as this segment is concerned.
The SMEs also are under stress as an industry if I am looking at but then again if I look at my portfolio, my overall SME portfolio has been behaving quite very well.
Your restructured assets are a little more than 3% of your overall assets. How much of that will actually turn into NPAs?
About 10% to 15% is the normal slippages which one has seen as far as the restructured portfolio is concerned, but we have been able to restrict the delinquency to 1%. As a benchmark, I would still say 1% delinquency could be one of the best as far as the international benchmarking is concerned.
Your net interest margin (NIM) last quarter dropped by 58 basis points. Will you be able to maintain this NIM for the next few quarters?
Let us look at our NIM from two angles—domestic NIMs and international NIMs. As far as international business is concerned, our NIMs have by and large remained at about 1.3 % to 1.35% levels. I would expect those margins to continue. As for the domestic NIMs, in the first quarter two things happened. One is the interest on the savings account was increased by 50 basis points. It had an impact of about 13 to 14 basis points in terms of the NIMs. Secondly, the increase on the deposit cost was felt in the first quarter without a corresponding increase from the interest income. In the second quarter we have seen the base rate increase twice by 25 basis points each. NIMs are under pressure, but we should be able to manage with an impact of not more than about 7 to 8 basis points as far as the current quarter is concerned.
Your low-cost current and savings accounts (CASA) as a percentage of overall deposit base also dropped little bit in the June quarter.
I think one doesn’t look at the growth of the low-cost deposits on a quarterly basis but on a sustained average basis… About 34 -34.5% is a reasonably high CASA and to my mind this would continue. I am particularly interested to ensure that this CASA growth is a uniform sustained growth rather than the terminal numbers. That would give the real benefit in terms of moderating the overall cost.
What is your one line message to your investors?
I would only say that look at the consistency with which we have been performing in the sustainability of our business model; quality of business has been the hallmark of whatever we are doing. I would go back to one important point—all these developments, consistency, business growth, sustainability have come about by taking a number of initiatives, especially on the HR (human resources) front. If the bank is able to demonstrate strength and make progress vis-à-vis competition, the basic factor responsible is the HR initiative, the team effort which has gone into this and the total commitment which one has seen from the entire rank and file.
It’s more about managing people than managing money?
Obviously, once you manage people, you can manage anything.
You have more than a year to go, a very long tenure, and I hope that your successor would not say that you did not provide enough and suddenly the NPAs rise.
Last three-and-a-half years, I have been talking about two things. One is the quality of business and the other is sustainability. If I have been able to do anything in this bank, I think I would say quality of business, sustainability of growth. It should continue much stronger beyond my term here.