Mumbai: Allahabad Bank, India’s oldest lender, wants to build its overseas business in a big way. Currently, one-branch overseas business accounts for only 1.5% of the bank’s balance sheet. In an interview, J.P. Dua, chairman and managing director of the 147-year-old Kolkata-based bank, said he wants to increase the overseas business to 6-7%. The lender is also planning a $500 million (around Rs.2,260 crore today) medium-term note (MTN) issue to raise resources. Edited excerpts:
You are headquartered in Kolkata and most of your branches are in central India, but it seems that you haven’t been able to exploit your unique presence in the hinterland of the country.
The bank has a pan-India presence, but yes I agree that we are very strong in central India. We are very strong in Uttar Pradesh (UP) with more than 700 offices. We are also strong in Madhya Pradesh, Chhattisgarh and Bihar. This hinterland accounts for about 26% of the bank’s business, and bulk of our priority sector loans comes from this geography only. Finally, much of my Casa (current and savings accounts) also comes from this hinterland. It’s a healthy 33%. I have a strong brand identity in this area.
Your brand is very strong in that part of the country, but when it comes to transforming this into a business opportunity, you have not succeeded. You are using your presence just to fulfil the priority sector lending norms, which is 40% of any bank’s loans. Those banks that do not have a strong presence here, too, fulfil their priority sector loan norms.
Allahabad Bank is one bank which has never defaulted in priority sectors lending. My exposure to priority sector loans is always above 40%. I have never defaulted in agriculture lending. We are one of the major banks financing agriculture, and our farm loans are always more than 18% required under Reserve Bank of India (RBI) norms. I have 17 lead districts, out of which 13 are in Uttar Pradesh and two are in Madhya Pradesh. May be the volumes you see for the bank as a whole are less because in agriculture the size of loans is normally small.
Changing stance: Dua says restricting retail loans was a conscious decision taken two years back, but now the bank wants to raise the share of such loans to 20% from 14%. Photo: Indranil Bhoumik/Mint
You don’t offer interesting products. This is why possibly despite being the oldest bank in the country in terms of assets, you are No. 16.
Yes, we are 16th if you take into account all banks, but 11th among the public sector banks.
Your strong presence in the hinterland is also an opportunity for you to drive financial inclusion.
Coming to financial inclusion, we have been allotted 2,618 villages with the population of more than 2,000 and another 15,500 villages with a population of less than 2,000. We have achieved our target in the first year. We have already covered 1,054 villages and are covering rest of the villages this year. So, villages above 2,000 population have been taken care of.
Simultaneously, we are taking care of villages which have a population of less than 2,000. By 2014, we hope to cover all the villages allotted to us for financial inclusion.
Are you making money in this drive? Or doing it because the government and RBI are pushing you to do so?
You have to see this as an opportunity. Today, half of India does not have bank accounts. And, what’s the use of talking about bank accounts when they don’t know even what a bank is? Once we bring them to the bank and they become customers, we have to offer more than one product. We offer them a credit card—the Kisan credit card, a smart card—which takes care of their other needs also. We are developing a micro-insurance product, which will also be offered to them. We also offer them overdraft facility.
Are you making money on these products?
First of all, they have to join the mainstream and they have to become customers. It is up to us to make it a profitable business. It is an opportunity for the bank and it’s going to be a profitable opportunity.
When will you start making profits in this business?
It’s just the beginning. We have just opened the accounts. Our first target is to open the accounts and gather the savings.
A bulk of your stressed assets is coming from the agriculture business. Your non-performing assets (NPAs) have gone up by 60% last year and bulk of them came from agriculture and West Bengal. At the last state-level bankers committee meeting, you focused on that.
In agriculture, small loans constitute a bulk of my NPAs. Out of Rs.1,645 crore NPAs, Rs.1,000 crore are small loans—less than Rs.5 lakh each. I am a bank, which finances not only agriculture, but also micro and small enterprises.
Many small loans turned NPAs because of drought. Last year, eastern UP, the whole of Bihar and Jharkhand and some districts of West Bengal were declared drought-hit and recovery was affected.
But this situation will not be there forever. At the end of the day, bank will find that agriculture is a profitable business. We have to live with NPAs.
Are NPAs the legacy of the loan ‘mela’ the government had three years ago?
I would not say that, but a part of this could be because of the relief that the government had offered. The scheme had two parts—debt waiver and debt relief. While the debt waiver was funded by the government, the debt relief was partly funded by the government and a part was to be paid by the farmer, which has not come.
Why is the bulk of this problem loans in West Bengal? Of your 2,417 branches, only 480 branches are in West Bengal, but more than one-third of bad assets are from this state.
We have to build up our recovery of bad agriculture loans. We are going after this in a big way.
As a banker, do you see the recovery culture in West Bengal worse than in other states?
I think it is improving slowly. Industrial sickness was there. A lot of other factors were also involved in this—it’s not bank funding alone. There are other issues also.
Lack of infrastructure and labour problems?
Yes, infrastructure, labour, there is still sickness and there are some demand issues also. Many factors make an account sick.
With the change in government (in West Bengal), do you see any change in the psyche of your borrowers?
One is the aspiration of people. People have a lot of expectation from the new government.
I met the finance minister once. I find the government very positive, very proactive and serious. Going forward, we are looking for a very exciting period in Bengal.
Will the business of banking change?
Surely, it will change. They don’t have a baggage with them, so they are starting afresh. I think things should improve.
Unlike your neighbour Uco Bank (Ltd), which was set up by a corporate house, Allahabad Bank was set up by a bunch of Europeans in Uttar Pradesh. You don’t have a corporate history, but corporate loans form bulk of your book and retail loans constitute only 14%.
It was a conscious decision taken two years back to restrict retail loans because of high delinquency. In the whole industry, delinquency in retail loans is very high. We have put up a structure now and started giving retail loans. We have 27 retail banking boutiques throughout India and these boutiques take care of due diligence, loan disbursals and loan recovery. Last year, we dispersed Rs.5,000 crore fresh retail loans and in next three years, we want to take the share of retail loans in the overall loan portfolio to 20% from 14% now.
So, share of corporate loans will come down.
We have divided our business into two verticals. I have a corporate vertical—10 large corporate branches in major places including Mumbai, Kolkata, Delhi, Chennai, Bangalore, Hyderabad, Ludhiana, where corporate loans are dispensed.
We have branches located in various clusters to cater to the small-scale industry.
Then, we have rural branches and rural zones, which take care of agricultural set-ups. Finally, we have 27 retail banking boutiques, which take care of retail assets.
We are opening 150 more branches this year in places where we are not present in a big way.
Last year, we grew about 27%, little better than the industry; this year, our target is to grow around 25%, little more than the industry.
Have you been able to achieve that in the first quarter?
Yes, it is as per the target.
So, you don’t see any signs of slowdown.
See, there are some areas where slowdown is there, but there are other areas where there is a big growth.
Where are you seeing slowdown?
Exports, auto components, engineering goods, drugs and pharmaceuticals are doing very well. We see some slowdown in segments such as consumer durables, housing....
Property prices are going up and somewhere I find they are going beyond reach. So there is a slowdown.
There are loans in the pipeline and disbursals are taking place, but yes, we see lesser enquiries for new infrastructure projects.
You have substantial exposure to the power sector.
Yes, my total infrastructure (exposure) is around 19%, out of which 12% is towards power. And out of that 12%, around 6% is towards generation and 6% is towards distribution.
Are the borrowers asking for loan recast? Is there any delay in repayments?
As of now, I don’t find these things. My loan book is very healthy. I have no issue as I have good quality of borrowers with me.
Considering that you are predominately a corporate bank, your net interest margin (NIM) is quite healthy.
Let me clarify. Yes corporate is a big business for me, more than 50%, but I am into agriculture and small industries, too, in a big way. I am also getting into retail loans.
My NIM was around 2.62% three years back and it rose to 3.49% in March. I have been able to contain my costs. It was 5.83% last year, much below the industry average.
How did you do that?
I got rid of all bulk deposits. As on 31 March, my bulk deposit was nearly around Rs.300 crore only. My whole thrust has been on Casa. Last year, I opened 1.3 million new saving bank accounts. This year again, I plan to open about 1.5 million fresh saving bank accounts.
Is the current level of NIM sustainable?
Yes, I think we will be able to sustain more than 3% this year also.
Even though interest rates have gone up, there’s virtually no change in your yield on advances.
We go for better quality assets and prefer to charge a quarter percentage point less. I can charge more, but then I have to compromise on asset quality.
You have one branch in Hong Kong and the business tripled last year.
Yes. We are doing very well in Hong Kong for the last two years. Our business has grown and we have approached RBI for another branch in Hong Kong. We have also approached RBI for branches in Shanghai, Dhaka and Singapore to take care of overseas operations. Currently, overseas business contributes around 1.5% (to the bank’s balance sheet) and we want to take it to 6-7%. So we’ll have these four new branches. To take care of resources, we are coming out with an MTN issue with $500 million. In another two months, we’ll complete the exercise.
You said 50% of people don’t have bank accounts in India. It’s hugely under-banked and there is a big market. Why do you want to go overseas?
Banks grow and go where the business is. Indians are going abroad and setting up businesses and doing very well. Our Hong Kong business has been growing so well. We want to do well within India and overseas. To begin with, we started at Hong Kong and we opened an office in China.
You picked up a 30% stake in a general insurance firm. This is one business that doesn’t have much synergy with banking.
General insurance has a synergy with banking. If you look at the kind of assets our bank has today, insurance is a logical extension for us. That’s why we promoted Universal Sompo General Insurance Co. (Ltd) in which we have a 30% stake. It has completed almost three years. We are on target. The premium collected is around Rs.300 crore. In the next one year, it will break even and this will be the fastest break-even for any general insurance company.
You also have stake in an asset reconstruction company?
That’s right, we have taken a stake in ASREC (India). It had done some good business last year and I think it will give us dividend. It has a bright future.
Are you selling your own bad assets to this company?
It can also bid for such assets—it’s an open system but it’s not necessary that we’ll sell only to them. There are so many asset reconstruction companies that buy bad assets.
You are expanding overseas. How easy is it to do banking sitting in Kolkata, far away from the financial markets?
I don’t think in today’s time, any place is a difficult place. Kolkata is one of the major metros. In fact, it’s the gateway to eastern India. I think we are at the right place and connectivity is very easy today. We are well established in Mumbai, Delhi. My treasury is from Mumbai.
How is the trade union scenario?
We have no issue. In fact, one achievement of the bank is that all the 22,000 people speak the same language—the language of growth.
What would you like to do in the next one year before you retire in August 2012?
The vision for the next three years is—we should have 3,000 branches and 2,000 ATMs. Our thrust is on compliance, asset quality, cost and capital efficiency.