Mumbai: The perception that public sector banks do not attract talent as they cannot pay money is no more relevant today, said M.V. Nair, chairman and managing director of Union Bank of India. Nair claimed at a certain level public sector banks match and even offer better salaries than competitors in the private sector. Edited excerpts:
In the June quarter, Union Bank’s profit dropped, bad assets grew, and business shrank. What’s happening?
The quarter-to-quarter analysis in the banking context is not a right analysis to do.
What’s the right thing to do?
The moment you focus only on the quarter numbers, you will be missing the medium-term and long-term view of an organization. A bank is an organization that has got not only the profit motive, but also the motive of supporting the economic growth and you miss that out totally if you look at only the quarterly numbers.
Recruitment Angle: Nair says there is no point in opening new branches if the bank can’t provide adequate manpower; Hemant Mishra/Mint
Having said that, quarterly numbers are also important, but there are issues which may get factored in a particular quarter’s number.
You started the year with a 26% credit growth target; you brought it down to 22% and again to 19%. But actually in the first quarter, it shrank by 3.6%.
You are absolutely right. The guidance that we have given is 18% credit growth, reduced from 19%. The policy rate has gone up 11 times since March 2010 and there is a clear focus on bringing down the loan demand to fight inflation. The growth has started tapering off. In a situation like this, when the interest rate is running very high, a banker should tread very cautiously. That’s the first important message for a banker.
After having grown for three consecutive years at 5 percentage points higher than the industry, we have taken a very conscious call that the credit growth in the bank will be somewhere closer to 18%.
Does that mean that companies are asking for credit and you are saying no?
It’s not like that because you need to keep relationships with corporates. The existing relationships where credit enhancement is needed and justified, we are fully meeting that. And 18% is a good growth rate; it’s not small growth.
The need of the retail segment is taken care of.
The clear shift in our focus is agriculture and we are very focused on small and medium enterprises as well. We are not denying credit to our existing customers, but when the growth itself comes down, the credit growth is also expected to come down.
What’s your take on interest rates? Have we reached the peak?
Right now, inflation is not at the comfort level of RBI (Reserve Bank of India)—9.2%. It’s expected to be at this level as per our internal reading until November, and may be going forward, it will come down to 7% by March. The Reserve Bank has made a point that growth with an elevated inflation is not the new normal and it is focusing on 3-4% inflation in the medium term. So, it clearly gives an indication how the Reserve Bank is looking at interest rates.
So, more rate hikes?
I would like to explain it slightly differently. There is a time lag between a rate hike and its impact to be seen. We have seen the June quarter GDP (gross domestic product) numbers—7.7%. It’s below the projected 8%, but still quite high. What it means is growth itself may not be a major concern for Reserve Bank even today. Our reading is that there is a possibility of a one-time increase of 25 basis points in policy rates and that could be the end of it. Post-March 2012, the interest rate cycle may start coming down, unless some major events take place globally.
In the first quarter, your deposit base shrank by 1.6%.
Yes, actually even deposit growth target has come down in alignment with the projection of the Reserve Bank. We have quite a few technology-based interventions that have enhanced our ability to get quality accounts. So what we are trying to do is enhance Casa (current and savings accounts) and reduce the high-cost deposits because the interest rates have gone up substantially. In the medium term, we will hold on to our cost structure with a margin which is adequate to support our growth.
Typically, banks’ deposits and credit go down in the first quarter of a fiscal year. Do they window dress in the last quarter?
We may not call it that way, but bankers would like to see their growth numbers very positive by the year-end and there is another important thing—the government spending takes place in the last quarter. So the banking system’s deposits go up. Corporates, too, borrow heavily. You are also a player in the overall system. There is a natural tendency in the last quarter for numbers to go up. Some of them may try to inflate, but even otherwise also the numbers would go up. If you analyse last 20 years’ balance sheets of banks, last quarter numbers are always high.
Why do they come down in the first quarter?
Then the utilization takes place. So, in the first quarter you will always find numbers coming down. It is a normal tendency.
You said that you will grow your low-cost Casa. In the first quarter, your Casa actually dropped by 106 basis points and its drop is more than the overall drop in deposits.
That’s right; as I said do not look at the first quarter. One of the key focuses of the Union Bank is the government business. The government flows are substantially higher in the last quarter. But how exactly would our position be by the end of this year? Our Casa should be somewhere in between 33% and 34% by the end of March 2012, up from 31.5% now. That’s where we want to reach.
Your Casa has fallen and so has your net interest margin (NIM).
It is down if you compare this with the last quarter of last year, but compared with the first quarter of last year, it has gone up. The comparisons have to be proper. Last year’s 3.33% NIM was over and above 2.7%, which we had in the previous year. The guidance that we had given for the year is 3.2%. It’s good number and we will be able to achieve.
Your fee-based income is down.
Yes, there is a very interesting story to tell. For four consecutive years, we had recorded core fee-based income growth of 35% CAGR (compound annual growth rate).
Fee-based income itself can be divided into few parts. One is treasury-based, which goes by the overall market, and the second is recovery.
Other than that is the core fee income and that is where your new products that you opt for or new areas you enter become important. Union Bank entered into quite a few new areas. These had led to 35% CAGR growth of core fee income. I see no reason why it should not be similar as we prepare for the next phase of growth.
Your net profit was down 22.8% as you had to set aside money for bad assets. Your non-performing assets (NPAs) have grown. Gross NPA is now 2.5% of your advances and net NPA 1.32%. Will you be able to achieve projected 2% gross NPA by the end of the year.
It’s absolutely achievable. You should look at the whole year. Strategy wise, we had factored in how our numbers are going to change because today we have full control on the way the slippages are taking place. Up to September, the possibility of slippages is expected to be higher.
About 4% of loan assets are restructured loans.
Post-September, our NPAs are expected to steeply drop. You may ask me how do I know this. You know, the standard account itself gets classified into three categories—early alert system one, early alert system two and special mention account. Even if one instalment is pending, it comes in the early alert system one. Our focus is to closely monitor all these accounts and that’s how we have projected these numbers.
In 2008, the gross NPA was 2.18%; in 2011, after going through a difficult period, it is slightly higher. As a public sector bank, when many other banks withdrew, we went on lending. Globally, every bank had stopped extending credit in 2009. But here we took a view to lend. I was the chairman of IBA (Indian Banks’ Association). Every 15 days we used to monitor all public sector banks and see how much sanctioning has been done to the productive sectors so that the wheels of the economy keep going. We were taking a risk there, but it is a worthy risk to take as otherwise there would have been a loss of jobs. There are many issues that need to be factored in and in spite of that after four years, if our NPAs are coming down, we should be happy about it.
You have shifted to system-generated NPAs.
We are moving from a legacy system to the totally technology-enabled system. It’s a big challenge; like any other private sector bank, we are starting with a clean slate. Union Bank has 30 million accounts. We put in place CBS (core banking solution) in 2008; now we are cleaning up our entire data and moving into a technology-based system. During this period, the MIS (management information system) will get into some fine-tuning, NPA will be fine-tuned and clean data sometimes may show up higher NPA, too. It can happen.
The finance ministry has written a letter to all the banks saying that they should get into that CBS. The ministry also wants banks to take a close look at the micro and small and medium enterprises and if required restructure them.
We should appreciate one role of the finance ministry that they are the majority stake holders of public sector banks.
Being a majority shareholder, it’s natural for the department of financial services to see that public sector banks are healthy and competitive.
So it’s the owner’s right that they are exercising?
I think so, because as an owner, one is suppose to look at it.
But shouldn’t they be in close coordination with the regulator?
I think they must be in close coordination. We do not have an access to what do they do.
Your plan is to have 400 branches during fiscal 2012. But in the first quarter, you could open only 22 branches.
We have a well-planned strategy to open branches. The opening of branches has to be linked to the availability of manpower. Unless we recruit people, there is no point in opening branches because you have a branch in a potential centre. If you don’t adequately provide manpower to exploit the potential, then opening a branch has no meaning.
Post-December, we will start opening the branches, even though they will be kept ready. The IBPS (Institute of Banking Personnel Selection) recruitment system will give us manpower only in December. Out of 400 branches, 100 are financial inclusion branches that will open by December. They are one-man, two-man branches.
So 300 branches in 120 days.
You may ask me whether I am very particular that by March all should be opened. No, I’m not; it’s a number. It can happen in two quarters also because the trained manpower should be available. But in the medium-term perspective, we will keep opening large number of branches so that the Casa percentage is good.
You are one of the CEOs who have been very strongly advocating market-related salaries. Why do you have to wait for IBPS to supply people?
As of now, we are bound by the government guidelines and we have to advertise on all-India basis and based on the applications that come in we can recruit. Union Bank can also go for an advertisement recruit, but that would involve lakhs of people to be interviewed for which IBPS is very eminently positioned.
You do poach other banks also.
We do take from the campus and also from other banks. When I need credit officers or treasury mangers, we advertise and take from other banks. It’s a multiple way of recruitment. Right now, we are in the process of recruiting about 50 charted accountants.
Do you see any merit in the argument that banks should have their own wage system and the industrywide wage system should be dismantled?
It will take time because the government has to look at it. There are merits in both collective bargaining as well as individual handling. In the last five years, we have covered a lot of distance. Today up to scale III, which is the largest number of our staff, we are matching or we pay better than some of the competitors.
You mean private sector?
Yes, that’s the reason when we advertise for scale one officers, we get great response.
You are talking about cost to company. In that case, even a public sector bank chairman’s cost to company will be comparable with the private sector.
Absolutely. The compensation-based argument for not getting talent is no more relevant. Today, when we advertise, we get lakhs of applications. We are able to pick up the best people.
You have said that you want to give the best experience to customers in retail banking.
I have been in this bank for six years. As a chairman, my role is to set a vision for the bank and bring in transformation to prepare the bank fit for the future. Today, we have 350 million customers serviced by the entire banking industry. In the next 10 years, we are expecting 350 million young customers joining. It’s a totally new segment. The bank that has prepared for it will succeed.
We are experimenting with branch…you are interacting with my staff, you operate the ATM, you may call my call centre, you may operate on the Internet or you may use mobile phone banking. All five channels are available to you. I want to see you as a customer who constantly experiences customer services in Union Bank through any of these channels. I should not have a luxury to say “I have put up an ATM why don’t you move there?”.
You are the chairman of an RBI committee to look into priority sector lending. What are the changes that you are likely to recommend?
The committee has just set up now and it has very eminent members. The terms reference are to review the guidelines that we have in place and look at the norms and if need be make recommendations for new norms. We would like to interact with large number of stakeholders and then only we will firm up the recommendations. While it is true that the priority sector norms are there for a long time, one important thing to understand is that today 50% of farmers are not given credit, almost 80-85% of the micro entrepreneurs are not getting credit. Which segments to be brought in is an issue we may have to debate.
This is an edited transcript of an interview that was first telecast on Bloomberg UTV on Thursday