Mumbai: Public sector lender Bank of Baroda (BoB) plans to enhance its focus on international operations, which now account for about 25% of its profits. The bank will convert its representative offices in Australia, New Zealand, Malaysia and China into full-fledged branches and set up 10 new overseas branches, taking the total kitty of overseas branches to 82.
In an interview with Mint, the bank’s chairman and managing director, M.D. Mallya, who completed 50 days in office on 24 June, discusses BoB’s growth plans. Edited excerpts:
What kind of growth target do you have in mind for the bank?
Optimistic outlook: Bank of Baroda chairman and managing director M.D. Mallya. (Photograph by Abhijit Bhatlekar / Mint)
We are expecting a growth of around 22% in total business. As far as deposits are concerned, we are expecting to grow at 20% and advances are estimated to grow at 24%.
There are four public sector banks in this country which are larger than your bank. How do you plan to build scale?
Excluding State Bank of India, we are the fourth largest bank. The difference in size between us and the three banks—Punjab National Bank, Bank of India and Canara Bank—is not very much. It could be Rs2,000-3,000 crore.
We would like to increase our market share this year. Our market share now is in the range of 3.55-3.65%. We would like to add at least 20 basis points to our market share. The plan is to have sustainable and profitable growth with quality.
On the liability side, we want to grow with a proper mix of various segments of deposits. For example, CASA (current and savings account) is a concern for the banking industry. So our focus will be to ensure that we continue to generate substantial growth and build on the 30 million customer base that we already have.
Your fourth quarter results showed pressure on your net interest margins...
In the context of the present scenario, every bank was under pressure during the fourth quarter. The pressure on margins has also been rising. Given our present orientation towards improving the CASA and moderating the overall cost of deposit, in the current year we would be able to sustain our net interest margin of 2.93%.
Do you see any slowdown in credit demand?
Yes, in the consumer finance and personal loan segments.
What about the investment demand from firms?
Investment demand continues to be reasonably okay. In the power and infrastructure sectors, there has been demand for credit. Overall, I don’t think there is a deceleration in the growth of the economy. The economy will grow, may not be at 9% as projected, but at 8-8.5%.
What is your priority?
On the liability side, moderating the cost of deposit will be one priority. We want to increase our CASA by about 25%. Higher CASA brings down the overall cost of deposits as banks do not pay any interest on current accounts and pay 3.5% on savings accounts. Our CASA is now about 35.8% on a deposit base of Rs1,10,000 crore.
We want to grow the retail deposits and not concentrate on bulk deposits.
Do you think a slowdown in economy is leading to deterioration in the asset quality?
I don’t think so. If a proper monitoring system is put in place, there won’t be any deterioration in asset quality. At least, I haven’t noticed that yet.
What about recovery of bad loans?
Last year we recovered Rs972 crore. This year, the efforts would continue in the same direction and would try to recover Rs950 to Rs1000 crore. If this is achieved, we could see a further reduction in our non-performing assets (NPAs). Our net NPA was 0.47% in the last year. It may come down to 0.40% or even 0.35% in current fiscal year.
What will be the impact of the farm loan waiver on your balance sheet? Will you be able to meet the deadline of 30 June?
We have in all Rs502 crore covering about 223,741 small and marginal farmers. For other farmers eligible for a 25% debt waiver, the total estimated amount is Rs161 crore. As far as waiver is concerned, the government would be funding the banks. Therefore, this is an opportunity to clean up our balance sheets.
It’s a three-tier process. First, the rural branches identify the borrowers. Then, the list prepared by one branch is verified by another neighbouring branch. Finally, people from our inspection department certify what is done is absolutely correct and transparent. These three layers of implementation are complete. We are absolutely ready to meet the 30 June deadline.
What about the moral hazard part? Are you not afraid that in future farmers will take loans and not repay?
That is not the case. Probably they are also aware that this is a once-in-a-lifetime opportunity and it won’t be repeated. I don’t think this will spoil the credit culture.
Have you undertaken any cost cutting exercise?
One exercise that we already implemented last year and we are taking forward this year is that wherever we have a branch with a substantial area on lease but we do not require the entire space for business, we are surrendering the extra space. This brings down the cost of rental.
Almost 100,000 sq. m of extra space was surrendered last year and this has been a substantial savings for us. This year also we are trying to reduce about 1 lakh sq. m of extra space.
What are new business areas you plan to venture into?
We are getting into online trading pretty soon. We want to take it seriously and should be able to introduce it in one month.
What about your capital raising plans?
Our capital adequacy ratio as of now is 12.94% and out of this tier I or core capital is 7.83%. We are well capitalized and have headroom to raise both tier I and tier II capital in the current year. In addition to that, the rating exercise that started last year can also relieve some capital.
How is that?
As per Basel II norms, the rated customers carry lesser risk weight vis-a-vis unrated customers. So far, all loan accounts of Rs50 crore and above have been rated. From next year, we are taking Rs10 crore and above accounts for ratings. As long as the ratings are good—AA and above—the risk weight comes down from 100 to 20. A reduction in the risk weight will lead to a reduction in capital requirement.
I believe you’re betting big on overseas operations...
Our overseas operations are doing extremely well and this is our focus area.
Of the Rs1,435 crore of profits last year, international operations’ contribution was almost 25%.
And rest assured, we are not into a subprime mortgage crisis. We have no exposure to the subprime segment. We have exposures in credit-linked notes of about Rs1,000 crore but these are all AAA-rated Indian corporations which have been doing very well.
We have opened representative offices in Australia, New Zealand, Malaysia and China which we will be converting into branches in the current year.
How about branch expansion within India?
We are opening 150 branches this fiscal year. We already hold about 90 licences for new branches and these will be opened before September. We would move the Reserve Bank of India seeking licences for 150 more branches and will be able to open at least 60 of them in the current year.
We will also open about 10 overseas branches in addition to the existing 72. International business has been the mainstay of our growth and we will continue to focus on them.
We have already set up a subsidiary in Trinidad and Tobago, which is doing well and we see a lot of potential there as there are a lot of Indian-origin people.
Maybe a couple of branches would be opened in this territory in the current year.