Mumbai: K.R. Kamath, chairman and managing director of Punjab National Bank (PNB), is not worried about bad assets going up as banking is a business of taking risks and the formation of non-performing assets, or NPAs, is an integral part of banking. “If I shy away from NPA, probably I will shy away from sanctioning loans also," Kamath said in an interview. Edited excerpts:

Your business growth in the first quarter was far ahead of the industry. Will this trend continue?

Survival strategy: Kamath says the bank’s focus has always been not to let the low-cost Casa ratio fall below the 40% mark. Pradeep Gaur/Mint

The Reserve Bank of India (RBI) has projected 18% credit growth for the industry this fiscal.

We may end up having 20-22% credit growth. That’s what we had projected in the beginning of the year. We have not changed our projections as of now and we still feel confident that we should achieve this.

So you are seeing a progressive slowdown, quarter on quarter.

Yes, normally we look at it from a year-on-year growth perspective. Since there is an impact of the slowdown and the growth rates have started coming down, that’s visible in PNB’s numbers. But our growth will always be and has been above the industry.

What kind of feedback are you getting from your corporate borrowers?

The projects which are in the pipeline are going ahead but firms are slowing down a little bit on new projects. One should not attribute everything to rising interest rates. When you implement a project, it is spread over five years and during this period rates go up and come down. At the end of the day, it’s a zero-sum game.

So, don’t look at interest rates as isolation. There are many other factors which are very dynamic.

Such as?

For instance, there can be a slowing of demand. If the demand slows down, then you won’t increase production.

The Reserve Bank of India wants the demand to slow down.

The point is that we always have been looking at interest rates as the sole factor in deciding the investment in this country and this is not correct. Interest rates may be one of the factors.

Till recently PNB was always eager to cut rates and your lending rates were slightly lower than the industry. But now you seem to be very aggressive in raising rates.

I think you need to understand that when you are talking about our loan rate being the lowest, we had the BPLR (benchmark prime lending rate) system and today we are talking about the base rate. Our BPLR even today is the lowest.

Almost 40% of our loans are on BPLR. One should understand the change of dynamics. In BPLR, there was a provision to give loan below it and so it’s relatively easy to handle the situation. Today, you can’t go below the base rate and the base rate composition has been very clearly defined.

Secondly, RBI has been continuously saying that they are interested in seeing the transmission of policy rates. If that is the wish of the regulator, then as the second largest bank I should probably be seen translating the wish of the regulator very fast.

In the first quarter, your deposit growth was driven by bulk deposits and high cost of certificate of deposits. Overall, your high cost deposits is about 24%, up from 19% a year ago. The cost is rising quite fast.

We mobilize deposits when there is demand for credit and if we are in a position to maintain our net interest margins (NIM), there is nothing wrong in going for high-cost deposits.

This means your outlook on credit offtake is quite bullish.

There is credit demand and it’s not just that I am seeing it. Because there is a demand for credit, I am mobilizing bulk deposits. Even with the bulk deposits, the bank’s credit deposit ratio is 77% and this shows that there is a demand for credit.

I am in a position to handle the higher cost of deposits and NIM is the proof. I have the highest NIM among the public sector banks.

But there is a 7 basis points (bps) drop in NIM in the first quarter even though it’s still pretty high at 3.8%.

I have been saying that a 3.5% NIM is good for a public sector bank. We had 4.13% NIM at one point but you can’t sustain it. There is another issue—when your NIM is higher than others, people will say there’s a lot of spread that this bank is keeping.

Making too much of money...

But that’s not correct … Even when our BPLR was less, we had a similar NIM. The point is we do not go beyond once we have a formula in place on what is the rate to be charged to the customer. We don’t get into too much of a negation on that and try to pass on the right price.

We have said 3.5% NIM is sustainable. Last year we had 3.94% NIM and it has come down to 3.84% now.

The percentage of CASA or low-cost current and savings account has dropped 110 bps.

When interest rates are increasing, there is always a tendency among the customers to shift money from the savings bank account to term deposits. Then, there are products which give you automatic sweeps. A customer always likes to get the best. Once you go for the sweep account, the minimum required balance is kept in the savings account and the remaining money gets shifted to term deposits. In a rising interest rate scenario, there is bound to be a pressure on CASA.

But CASA in isolation doesn’t convey anything. I would always say CASA and NIM should be seen jointly. I have sustained NIM; CASA has fallen but I have not let go of a business opportunity available.

Internally we always say that we should not allow CASA to come below 40%. That’s our focus and we will work to come back to it.

Your infrastructure loans have grown 33% this quarter and out of that power sector loans have grown 73%. This one area almost every banker is wary about as many borrowers are asking for more time to repay debt and loans are turning bad.

One should understand that the infrastructure loans are sanctioned today and disbursed tomorrow.

We are talking about disbursements.

Yes, but for these sanctions happened two years back. When there was a global melt down (in 2008) and the growth was getting impacted, every banker started lending to infrastructure. If you look at it, it is not the bankers’ role to lend to infrastructure in a big way because you create as an asset-liability mismatches but today there is no difference between a developmental financial institution and a bank. We have all become a sort of a financial conglomerate. So we do both -- working capital and project funding.

The point I am trying to make is that the opportunity available at that point in time was infrastructure when every other industries withdrew from expansion. The demand for power has never been satiated in this country and it was felt that we should support the sector. Infrastructure in the form of roads and ports all contribute to the growth of economy and if this economy has to grow at 8-9%, you will have to lay foundation in the form of infrastructure development.

That’s about the economy but what about a bank’s balance sheets?

We have internal exposure limits fixed and we are within this exposure limit. Overall, we can lend up to 20% to infrastructure.

We have absolutely no issue as of now.

You have substantial exposure to telecom and some of the firms to which you have exposure are embroiled in the so-called 2G spectrum scam.

All these loans have been given in the ordinary course of business and nobody knew that there will be a scam of this sort. You must know that when we give a loan against a valid government licence, we don’t get into the process of giving that licence as that’s not the jurisdiction of a banker. I look at what is the security available to me. We lent money against a valid government licence.

Is there any other asset as collateral?

I need to clarify that our entire exposure is not to 2G spectrum. There are cases where we have given for creation of infrastructure like towers, transmission, etc.

Are you running the risk of some of those loans going bad?

No, as of now there is no risk because we are not fully aware what is going to happen to these licences. We feel that things should be alright. Will the licences get cancelled? I don’t think it will go to that extent because it involves a lot of faith and confidence of international investors in this country.

In the last quarter, your fresh bad loan accretion is about 2%. How do you plan to tackle this?

Yes, incremental delinquency has been around 2%. One thing I have always felt as a banker is that we are in the business of taking risks and the formation of NPAs is an integral part of banking. If I shy away from NPA, probably I will shy away from sanctioning loans also.

If somebody says that I give loans and there is no NPA, then he is not taking proper risks. You can lend to very safe triple-A rated companies and gather no NPAs but your NIMs will be affect. Forming NPAs is an integral part of the business of banking.

I have two questions: One, do we have sufficient money to provide for these loan loses? Two, do we have a mechanism to recover NPAs or upgrade them? My answer to both questions is yes. My recovery of bad assets is increasing quarter by quarter. I am not unduly worried.

Much of it is coming from the restructured loans. Restructured assets is about 6.3% of your overall loan book and 13% of that has already turn bad.

One should go back to what led to restructuring. The customers wanted tremendous support at that point in time (in 2008) and we were one of the banks which said that yes, whatever support you require, we will provide that. It was expected that after the recovery process started, things will improve. Now, we are stuck with some other issue in the form of slowing down. The restructuring factored in certain assumptions and we thought that things will move in a particular direction but if the directions get changed, there is a possibility that there will be NPAs.

When various credit rating agencies were predicting that 16-17% of restructured books will get bad we were saying 10% is a good number but today we say 15% should be the right number.

One large asset that has gone bad is the loan given to Zoom Developers Pvt Ltd.

We have started the recovery process in that account but I would not like to discuss on individual accounts. I have got a secrecy agreement with customers and I am not suppose to disclose.

But when somebody filed an RTI (Right To Information application), you did disclose individual transaction such as picking up a stake in MCX-SX with a buy back arrangement.

If somebody files an RTI, I am supposed to give the information as I belong to the public sector.

The government stake in your bank is 58%. You have a headroom for a public issue as it can can come down to 51%. Is there any plan to enter the market to raise money?

I can shore up my capital in two ways. I can go for bonds also and I have a headroom for almost Rs11,000 crore...

We are looking at various options. Once interest rates come down, we can enter the market with a bond issue. The second option is 7% dilution of government stake from 58% to 51% but we will have to see whether the government wants it that way. Immediately there is no pressure but if you take a long-term view, probably we will have to look at capital planning

Is that in next year?

Yes, probably next year. PNB is the only bank which has recorded a RoE (return on equity) of 20% consistently over the last 10 years and we have been funding our growth by ploughing back capital. We are seeing pressure now as our growth was 30% last year, but could not plough back so much as we had to make provision for pension liabilities and other things.