Mumbai: Arun Kaul, chairman and managing director of Kolkata-headquartered Uco Bank, wants to raise the bank’s retail loan portfolio and bring down its massive exposure to infrastructure sector in a bid to derisk its balance sheet. In an interview, he said Uco Bank’s quality of assets will improve and with technology in place and infusion of young employees, the bank will be able to attract young customers. Edited excerpts:

How different and difficult is banking in Kolkata?

Banking in here is slightly different from markets like Delhi and Mumbai. Mumbai, being the nation’s commercial capital, sees large business growth. Kolkata, probably because of historical reasons, has seen some decline in commercial activities. The culture is also different compared with Mumbai and Delhi, but nevertheless it is a good banking challenge.

With the change in government, do you see any change in culture?

The new government has recently come in. It’s too early to make any critical comment, but people have very high expectations... West Bengal has a good climate, good soil and quality people. Unfortunately, because of low industrial and commercial activities, we have seen a lot of brain drain and people moved out of Kolkata to other places, seeking jobs. I hope the new government will be able to address this and attract industries. The basic structure is very good.

Are corporations asking for fresh loans?

Seeking opportunities: Kaul says he hopes the new West Bengal government will address the issue of brain drain and attract industries. Photo Indranil Bhoumik/Mint

You have a long five-year tenure. What is your plan?

It does give me a chance to analyze the situation and execute the plans. The bank was set up in 1943 by G.D. Birla as a part of the Swadeshi movement. It did very well in the ‘50s, expanded in almost all major commercial centres in the country and overseas. In 1969, when it was nationalized, Uco was India’s fifth largest bank. Unfortunately, today we have slipped to the 13th position. We have slipped in terms of assets, market share. It’s a huge challenge and a good opportunity for me to plan my strategy.

Your non-performing assets (NPAs) doubled last year. How did it happen?

The moment I came in I noticed that the quality of assets was not up to the mark. We had to classify NPAs and initiate an immediate recovery. We could recover some and upgrade a few... Recovery of assets is a challenge and our major focus is there. In a bank, till you declare NPAs, the recovery process doesn’t start.

What’s your plan to prevent fresh slippages?

The focus is on two things— selection of right customers and the processes that you follow for the appraisal of loans. The bank in 2005 engaged the Boston Consulting Group to look at its processes. Following their suggestions, we have set up flagship corporate and mid-corporate branches. The corporate branches have stabilized and have good skill available to them. In the mid-corporate branches, some more skill is required. We are giving a lot of stress on upgrading the skill and technology in the bank to prevent slippages.

Is there any special recovery cell?

As far as the stress assets are concerned, we have a separate recovery cell. We have also created about five-six separate branches that don’t do normal banking transactions and focus only on recovery of bad assets. A special team of general managers is closely monitoring the recovery process.

The general perception is that whenever a new chairman takes over, the NPA level goes up as the boss wants to say that the incumbent was hiding things.

I did not try to prove anything. I simply looked at the balance sheet and whatever NPAs I found I had to declare and recover. If I had not declared them, the recovery would have certainly been delayed and the quality of the asset suffered. The sooner you attack NPA, it’s always better for the bank.

Hope after you step down, your successor will not say the same.

I hope so, because now what we are seeing are system-driven NPAs. As of 31st March, we are fully system driven (meaning: nothing is manual). All NPAs of 1 crore and above are declared by the system.

Another area of stress for your balance sheet is the bank’s huge exposure to infrastructure sector. At least 30% of your loan book is exposed to infrastructure and within infrastructure power sector accounts for 50%. You have not given much money to coal, tea or jute—traditional industries in West Bengal.

I am not only a West Bengal-oriented banker. I have 2,200 branches across India and 320 of them are in Bengal. During our growth phase over the last couple of years, the major focus was on corporate credit. Due to a lack of skill, we couldn’t focus much on areas like retail, SME (small- and medium enterprises), etc. Of the total loan book today, about 60-65% is corporate credit and that’s a very large amount. Within that, infrastructure has become a large part over the last few years. The bank has to push down bulk corporate credit and push up the retail, SME loan.

Isn’t high exposure to infrastructure a problem?

I wouldn’t call it a problem. It is high risk, yes. We need to de-risk the bank and so we must increase our focus on retail, SME, agriculture loans. We are going relatively slow on infrastructure.

Are you getting requests from borrowers to recast loans?

I don’t have many such requests.

A few?

Well yes. Some restructurings have already taken place.

Your exposure to non-banking finance companies (NBFCs) and trading is also quite high.

Many of these NBFCs have triple-A ratings and so I don’t perceive too much risk there.

But infrastructure is a risk?

Yes, we have a fairly large exposure to infrastructure and we do need to derisk our balance sheet.

Why is your retail loan book so low? Across India, people are buying homes, cars, taking personal loans. Is nobody coming to your bank?

We’ve some how not been able to leverage our branch network. Unfortunately…we’ve focused on large corporate credit and not on retail. Now we’ve started looking at retail products very carefully. Some of our retail products were slightly out of tune with the market. I have examined all our retail products and processes. For a bank of my size the retail book is 7-8%. It should be 20-25%.

We need to increase exposure to retail and derisk our portfolio and we’re working on it. We’ve set up 26 retail hubs across the country. We should be able to give quick sanctions so that customers don’t have to wait for long. Since the focus on retail wasn’t there, many products were not in line with the markets.

For example?

Take the case of housing loans. We had more than 70 variants with different margins and different rates of interest. We found that very uncompetitive and processing was taking a long time, while other banks were able to give housing loans within a week or so. I’m very hopeful of taking the 7-8% retail exposure to 8-9% and beyond. But a bank of my size should be targeting 20-25% and only then I can truly leverage my retail network.

Even your retail liability is quite low.

We’ve not been able to leverage our branch network. Our retail deposits are very low and we have an unusually large reliance on bulk deposits. There are a couple of reasons why our Casa (current and savings account) is low. Firstly, we were relatively slow in our approach to technology. We have few ATMs (automated teller machines)—only 680 and we’re planning to increase that to 3,000 by March. We have not opened too many branches in new growth sectors. The private banks have opened many branches in these areas. When I look at the top 100 growth centres in the country, I find that we are constantly losing market share. Now we’re focusing on these centres and planning to open branches.

Where are these new growth centres?

Take Gujarat, for instance. It has been seeing double-digit growth for last so many years. We have a network of just about 80 branches there. Gurgaon is a huge growth market where private sector banks have opened dozens of branches but we have just one or two branches. Noida is also a huge growth centre. The private banks have two dozen branches there and we have one or two. We’ve missed many of these markets.

Our customer acquisition is also relatively slow all customers belong to the 50-plus age bracket. We are not attracting young customers at all.

Despite a young 55-year-old chairman?

Unfortunately, we’ve not been able to offer products that appeal to the youth. We need technology, ATMs, 24-hour banking to attract them. We started very late, but now we’re going in a big way. We are acquiring 200,000 customers per month. We’re also doing a lot of cross-selling.

You are originally a Birla bank and had excellent relationship with virtually all firms in India. Once you said the bank failed to capitalize on that.

Yes, we are not able to capitalise on the relationship the bank had in the past. It had gone through a rough patch in the ‘70s, ‘80s and ‘90s. It had incurred losses in the 90s and at one stage it was in a critical position. Things have changed since then. We have trying to re-establish our relationship with the corporate houses and we would like to capitalize on that.

The loss-making decade in 1990s was due to work culture and rampant trade unionism. Has that changed?

The impact of the militant environment outside did have an impact on the organization. Things have not changed substantially. Technology has brought in changes. Now, we are hopeful that things would change for the better.

Your record of profit per employee and business per employee is very average.

Yes, I agree. The number of transactions, branches and number of customer are low. There is a need to scale up. It is providing me an opportunity to grow. We have made the optimal use of the branch network and the capacity with us.

Is there anything positive about the bank?

My operating profit last year grew by 58%—second highest in the banking industry. I agree that challenges are large, but there are opportunities. India is a large market and 50% of the population is not using the banking services at all. We are using the opportunity. With good operating profits in the last two years I think we will be able to come out of problems in a short time—in the next couple of quarters.

Will you be able to sustain your 3% plus net interest margin (NIM)?

We should be able to maintain 3% NIM. The reason for low NIM was low CASA base and dependence on bulk deposits. We are gradually reducing our dependence on bulk deposits and looking at better funds management.

What is your take on interest rates?

There has been upward pressure on interest rates in the past two years, primarily because inflation is moving up. Under such a situation, the Reserve Bank of India (RBI) has no other option, but to go with the tight money policy. Pressure of primary articles prices on inflation may not be high this year due to good monsoon and global commodity prices have also started coming down because recovery in the western world is getting delayed.

Inflation is likely to go down but, more importantly, inflation expectations are coming down. So probably RBI can change the stance of monetary policy.

What is your expectation from the quarterly review of monetary policy?

I would not speculate what RBI is going to do, but over the medium term I see inflation and interest rates coming down. The market does expect a 25 basis points rate hike.

Is this the last of the hikes?

Possibly yes. In next six to nine months, there is every possibility that interest rates start coming down.

Have you scrapped your plan to enter general insurance?

I would like to focus on banking first. We have not been able to use our branch network and customer relations. We are, however, continuously looking at other business opportunities. Our fee income is relatively low because we have never focused on that. Now we are focusing on other income by selling third-party products like mutual funds and insurance… We are also looking at loan syndication which will help us raise other income. We have recently launched online training.

A former trade union leader wants to come to your board. He is fighting elections with another independent director to whose son the bank has lent money.

Unfortunately, the board which is supposed to look at the fit and proper status has many questions to ask and we have referred the matter to the ministry. In the meantime, we have withdrawn the resolution of election.

Is neither of them fit and proper?

No. I did not say that. There are certain issues that need to be examined in detail. We will not conduct election because certain legal issues are involved for which we have sought clarity from the finance ministry. We would like to fill the position as soon as possible when we get the clearance.

What are the big challenges?

There are four major challenges—low Casa, asset quality, HR policies and the business model. The average age of the officers are 57-58 years and average age of employees is 52 years. The challenge is to motivate the people at that age group. The bank had been slow in recruiting youngsters in the past. We have started a big recruitment drive and will have to continuously recruit people. I have 24,00 employees of which 1,800-2,000 are retiring every year. In next four to five years, 45% of the employees will be young people below 30 and they will correlate very well with young customer.

How many branches have you opened in the finance minister’s constituency at Jangipur?

We have six branches and one mobile van. They are doing good business.

This is an edited transcript of an interview that was first telecast on Bloomberg UTV on Thursday.