Mr. MV Nair took charge of Union Bank of India as Chairman and Managing Director in April ?06. Earlier, he was the Chairman & Managing Director of Dena Bank after a brief stint as Executive Director of the same bank. He has a varied experience of over 30 years in the banking industry. He is the Chairman of the Indian Banks? Association (IBA). He serves as a Director on the Board of Agricultural Finance Corporation Ltd. He is also a member on the Governing Board of Institute of Banking Personnel Selection (IBPS) and serves on its Finance Committee. He is a member of the College Advisory Committee of Reserve Bank of India, College of Agricultural Banking, Pune. He is the Chairman of the Executive Committee of the Indian Institute of Banking & Finance (IIBF). He is Chairman of the Committee on Retail Banking and the Wage Negotiation Committee, both of the Indian Banks? Association (IBA). He is a member of the Governing Board of National Institute of Bank Management (NIBM), Pune. He is also a member on the National Board of Accreditation of AICTE.
He was a member of the sub-group on financial services under the High Level Group on Services Sector constituted by the Planning Commission. He is presently a member on the High Powered Committee set up by the RBI and headed by Usha Thorat, Deputy Governor, RBI, to review the Lead Bank Scheme. Mr Nair was also one of the finalists among other prominent industry captains, for the prestigious 10th Ernst & Young "Entrepreneur of the Year" award 2008.
Speaking with Anil Mascarenhas, Rajiv Mehta and Jasmine Kohli of India Infoline, MV Nair says, "Public Sector Banks with their vintage, sweeping presence across the country and dedicated customer base are ideally poised to head the growth."
The Public Sector banks seem to have come back with a vengeance as far as performance is concerned. What have been the key drivers for this change in dynamics in the banking sector?
Whenever new players enter the market, the dynamics of market share of business is bound to change. So it happened when new Private Sector Banks entered the scenario. The Public Sector Banks had lost around 13-14% of the market share, till around March 2007, to new Private Banks. However, all along Public Sector Banks were tightening their belts to address competition squarely. The process involved change in business models, introduction of the right kind of technology and upgradation of people skills. Admittedly, this did take time as it involved change in mind set, convincing reluctant Unions to co-operate for Technology intervention etc. Public Sector Banks did get it right eventually and those who could put in place the desired changes in time managed to arrest the loss of market share. Around 2008, this trend of loss of market share was completely reversed. The Customer in the process has got the best deal in terms of improved banking services and products on offer, not to speak of the wide choice.
What led to the gain in marketshare in FY09?
The Global meltdown had a lot to do with this. We cannot deny that there was a visible loss of confidence amongst Depositors and Investors, triggered by the fall of some giants in the financial services, albeit overseas. This led to investors and depositors choosing PSBs as a safe option resulting in the gain in PSBs market share in FY09. That said, it is wrong to assume, that this trend is permanent. In the long term a bank, whether it is in the Private or Public Sector, will make its mark only if it innovates and catches the customers? imagination in terms of products offered, quality of customer service, efficiency and convenience of operations.
On the face of it, one gets the feeling that in a difficult macro-scenario, the PSBs took a higher risk and hence outperformed?
It looks like that on the face of it. A close look will show that a few private banks were indeed more aggressive than the PSBs. We should bear in mind that the Indian Banking scenario operates a bit differently than in developed markets. Here banking is essentially relationship oriented. The basic ethos practiced in PSBs, as in some private sector banks too, is that you should be with the customer in times of need. Leave alone the recent global slow down, even in good times there are occasions when certain sectors don?t do well. At such times the banker has to do some handholding exercise to enable the customer to come out of difficulties. The client quality is of course always a factor in such decisions.
Typically, how would you decide on whom to write off and whom to handhold?
There is no strait jacket approach in such cases. Let me give you an example:
We had a customer, who was a fourth generation businessman in steel. After he made the bookings and the consignment was on its way, the steel prices fell steeply. The customer had already paid for the consignment and made his import keeping in mind a requirement of around six months. In such a scenario, we worked with the customer and goaded him to generate money out of his current business. We offered a time period of around three years to repay the dues. When we do such restructuring, we take a certain amount of risk; if the economy slides further, then the customer may get into trouble. If the economy improves, we would have recovered the entire amount. It is purely a judgmental decision.
Last year was an unprecedented year for most of the countries. Many countries followed unconventional strategies. In India, the government came with three stimulus packages. The Reserve Bank of India (RBI) adopted some unprecedented strategies of creating liquidity and restoring confidence among investors. India was among the very few countries where credit line was not choked. PSBs worked along with the government to ensure sufficient loan sanctions are done.
When the mutual fund industry went through some struggle, we held discussions with them and helped them tide over a temporary impasse. Similar steps were initiated with NBFCs when they experienced some struggling moments. As a result, the economy didn?t see any failures. As a result of the excellent collaborative strategy adopted, our economy didn?t experience much pain though the growth may have come down.
What is the market share PSBs enjoy and what would be UBI?s share?
PSBs as a group would be around 72%. UBI?s market share is about 3.4%.
What growth are you targeting this year?
We are targeting a loan growth of over 25% and deposit growth of 23% this year. We are targeting around 5% higher than what RBI is projecting.
What would be the key drivers?
To ensure growth in any business, it is important to identify and create engines for growth. We identified these engines in the form of Technology, innovative customer centric initiatives and product offerings. We transformed the Organisation?s approach by a radical transformation process named ?Navnirman?, in early 2007. We put in place a customer friendly technology and brought all our branches under the Core banking solution by March 2008. A series of customer oriented initiatives coupled with innovative product offerings followed.
From 1996 to 2006 we had opened 73 branches. From 2006 to 2009, we have opened close to 500 branches; a huge scale up in a matter of three years. Now, in 2009-10 we aim to open 500 additional branches. This creates huge capacity. We would also install around 1,000 ATMs this year. Our issuance of cards is also very high.
These key drivers were primarily responsible for orbiting our growth plans into reality.
What about alternate channels?
The transactions taking place through alternate channels, which stood at a mere 6% in Mar ?08 has soared to 21% in Mar ?09. This is expected to further improve to 35% by Mar ?10. We are getting a lot more younger customers who are savvy with the alternate channels. We added 3.3mn savings bank customers last year as against previous year?s 2.2mn customers.
Take phone banking where unlike the usual IVR system adopted by many banks, we have a 70-seater call center in Powai where response is available in nine languages.
Our mobile product is one of the best offering in the industry. All transactions can be facilitated. I personally send a donation to a family deity through my phone as against a money order earlier.
We then created verticals. For retail we have presently set up 40 Union Loan Points across the country which deals with car loans, home loans and other retail loans. We have a committed turnaround time. Within five days a home loan is cleared while a car loan will be complete in two days.
The branches, where Union Points are present, will not process these loans. They will focus on client acquisition, deposit mobilization, third party product sale and enhancing customer experience. Our growth therefore has a strong chance of remaining high.
We then identified 175 branches as business banking branches. These are located in SME clusters, trade clusters catering to mid-corporates. We extensively trained around 375 officers for these business centers. Only these trained officers would deal with traders and other clients in these business centers. The final sanctions are done by a centralized hub. Our software to facilitate this is again one of its kind in the industry called a Loan Automation Solution(LAS). Within a few months time we are confident of achieving a turnaround time of 15 days to sanction these loans. These measures generate a capacity to increase the credit portfolio.
For the large corporates there are 19 branches which cater to them and these branches directly report to the General Manager (Large Corporate) in the Head Office. This is a relationship-banking initiative where we go out to customers and sit with them to close a deal.
With 33 lakh accounts opened in a year, our liability portfolio is growing. With the mentioned verticals, we have the credit portfolio growing. This has created a capacity, which can grow faster than the industry.
What would be the growth from various segments to achieve 25% growth?
SMEs would grow at around 30%. Retail would also grow at around 30%. Agri could clock growth of around 20% and so would Large Corporates.
Your NIMs saw a more than anticipated correction in Q4.
NIMs were lowest in Q4. If you look at the full year NIM it was better than the previous year. We are targeting the coming year NIMs to remain at the same level as last fiscal. Within the twelve months, there are always ups and downs. The last quarter NIMs were hit because in the first six months, interest rates moved up substantially. Some of the deposits were contracted at interest rates of 10.5%, which come in different maturities. This has increased our cost of funds, which has not come down in the last quarter even as the overall situation in the economy underwent a change. CRR and Repo rates came down and liquidity was much easily available. The lending portfolio came down as any benefit has to be passed. This is a conscious strategy to keep the growth moving. We strongly believe it is not the quarter performance which matters but the overall strategy. The strategy at that point in time and even now is to work with the industry and work with the borrowers. We had to reduce interest rates even though our cost of funding remained high. To that extent our margins were under pressure.
This drop in NIM will continue this quarter too. Though the cost of funds has come down marginally, it will show appreciable downside only from July?09. At the same time we have to pass on the benefit. The loan book is growing faster than the industry. However, it is not growing at the same pace as our deposits. Even now, our deposit growth is around 34% whereas loan growth is only 24%. As a result we have surplus. The alternative we have is to reduce BPLR and lend the amount. This quarter NIM will be lower, next quarter it will be better. During the year, we should be able to maintain 2.8%.
The government seems to be pushing banks to cut interest rates. Despite the apparent pressures are you confident of maintaining your NIMs?
The language spoken by the government and the strategy followed by us culminate at one place. If the economy grows, banking sector becomes the beneficiary. It is in our interest that we act as a catalyst for growth. The cost of borrowing for industry has to come down. We are unable to reduce rates as per industry expectations because our cost of funds is high. It is not right for us to oppose bringing down BPLR.
Today it makes imminent sense to reduce first, take a hit on NIM and increase lending and enable growth. The funding cost may come down later. We have to take a call whether we can sacrifice and get the growth right.
Tell us more about your rate cut.
In July we will see a sharp reduction in our cost of funds. That has given us the option to cut rates. We will pass on the benefit from time to time.
We have announced a downward revision in our Benchmark Prime Lending Rate (BPLR) by 25 bps from 12.00% to 11.75% per annum effective 1st July 2009. There would be better maneuverability in pricing loan products during 2nd quarter of FY 09-10 when deposits already contracted at higher rate of interest would be repriced at prevailing lower interest rates. We continue to protect the interests of the retail depositors by offering interest at 8% pa on deposits of 1000 days and above.
The BPLR of Union Bank of India was last revised downwards to 12% effective 1st April 2009 and continued at the same level. This is the fifth successive reduction since November 2008 and bank has reduced a total of 225 bps in BPLR since November 2008.
The revised BPLR shall be applicable to all existing and new accounts where the floating interest rate is linked to BPLR.
Do you see the CASA numbers going up?
In 2006, we had around 32% CASA which was way below other PSBs (40%). Some banks like PNB had close to 50% CASA. We ended up with CASA of 30.13% as of Mar?09 as against peer PSBs CASA of 30.91%. However, it needs mention that while CASA % of peer group PSBs have declined by 904 bps, CASA % share of the Bank has declined marginally by 223 bps as of Mar?09 vis-?-vis Mar?06. We were able to bring down the gap between PSBs and ours from 759 bps to 78 bps in 3 years. While we added 4.10 million new customers in 2008-09, the corresponding figure for 2007-08 was 2.27 million. Among PSBs we are in the mid-level as far as CASA is concerned and by 2012 we plan to take CASA to 35%.
How much do you plan to raise Capital in the coming year?
We raised around Rs 2 bn through the issue of Tier-I perpetual bonds (at the rate of 8.85%) and plan to raise another Rs15 bn through tier-II bonds later this fiscal. The same would be used to finance the huge expansion plans in terms of business and capacity building.
Would you be looking at a rights issue?
We have a comfortable Capital Adequacy ratio of 13.2% and Tier I is 8.2%. We also have sufficient headroom to raise money through Tier I and Tier II. At an appropriate time, we will pursue raising equity through rights issue.
We are also investing in infrastructure which is a long term investment.
What is the amount of loans you restructured?
We did the entire restructuring in a very systematic and planned manner. Though a circular was issued by the bank it need not necessarily mean that the message was understood clearly. We held workshops through video-conferences to get the message across clearly. Our first assessment was that the total amount of restructuring may be to the tune of Rs 40 bn. When we completed the exercise the amount came to Rs 29.50 bn. We had 1.13 lakh accounts of which 170 accounts had outstanding of over Rs 10 mn. We restructured around 30,000 accounts of Micro, Small and Medium Enterprises (MSME) clients, totaling Rs 7 bn. Around Rs 6 bn of retail loans restructured include car and home loans which we feel will get eventually paid.
We have taken care to ensure that viable accounts and those justified through cash flows are restructured. Last quarter our NPA went up by Rs 6 bn since cases not meeting the set parameters of restructuring were allowed to be classified under NPA. In a worst case scenario, 15% of the restructured accounts may slip into NPA.
On the brighter side, if you remove this Rs 30 bn from the total portfolio, the stressed accounts are moved out and the remaining portfolio is a fairly healthy portfolio. The amount of NPA which could come out of the remaining amount would be lesser than the previous year. We built a model around this and found that on the lower side the delinquencies would be around 1.25% and on the upper side it could be 1.5%, during 2009-10.
How does this compare with the previous years?
Delinquencies were around 1.92% in FY06 and came down to 1.45% (FY07) and further lowered to 1.23% in FY08. In 2009, we had set a target of 1.25% but ended up having 1.59% since it was a difficult year. This fiscal, on the lower side it would 1.25% and on the higher side it would 1.50%.
NPAs will come down in percentage terms on the gross and net levels. So NPA levels as a percentage of advances will decline in FY10.
Which sectors were you seeing most of the restructuring?
These were in the affected sectors like gems and jewelry, leather, textiles and some in the commercial real estate.
What are your views on consolidation in the banking sector?
We will have to wait to see what the government has to say in the matter. Some things will be known when the budget is announced. The stand consistently taken by the Finance Minister is that if banks come together the government will facilitate and do the needful.
We have a stable government in place. Let?s wait and watch for the policies that will be announced in due course.
What about inorganic growth?
If the situation is conducive, we will look at it. We keep a closer eye on the prevailing environment, which is organic growth. We have aggressively pursued organic. In the next five years, if the opportunity comes our way, we will consider inorganic growth. Within the organization we have even developed the skills to take care of any integration.
You are among the few banks who are taking the people factor seriously by appointing an HR consultant. Tell us more about the initiative.
Our transformation process viz ?Navnirman? began with Technology followed by series of process changes and then the people change. We did manage to induct fresh and budding talents from top B-Schools.
One of the most crucial and challenging aspects confronting all PSBs, is to revamp the HR Policies and practices. Over decades, the HR practices of PSBs have only been stereotyped, therefore, lacking in innovation. Most of the HR Policies of the PSBs are limited to mere placements and promotion exercises and nothing more. It is more of a day-to-day Personnel Administration mechanism, rather than any HR initiative.
If we are to attract fresh talent in the banking industry and also retain them it is essential to revisit the HR portfolio and go for a radical revamp to suit the present day competitive scenario. It is vital that our work force is charged with motivation and desire to deliver triggered by HR initiatives Whatever be the importance of Technology in today?s banking I would rate people skills on a higher pedestal anytime. There is no point in continuing to gloss over the lack of pro-active HR approaches and it is time to urgently revisit this area. Hence, our initiative of roping in a HR Consultant to look into this and make recommendations for us to consider and implement which would include performance incentives and also creating a succession pipeline.
What about the age factor. What is the average age in the bank?
Admittedly, one of the biggest challenges confronting us, like any other PSB, is to bring down the average age of our work force, which was 49. In a country where the majority of the populace is below 35, we thought it is difficult to relate to these customers with an average work force age of 49. We went in for fresh recruitments close to 2085 in FY ?09. We have planned to bring the average age to 40 by 2012. We would relocate the experienced and senior workforce to centralized hubs, corporate office and other back offices and leave the customer interaction to the younger colleagues. Our head count which is now 29,000 will touch 31,000 by next year.
What is your message to shareholders?
The Indian Banking system is strong and resilient. It has the capacity to not only withstand global turmoil but also see a fantastic growth. Public Sector Banks with their vintage, sweeping presence across the country and dedicated customer base are ideally poised to head this growth. The stake holders will no doubt benefit from this growth. Union Bank of India, with all the initiatives planned and implemented with foresight and precision will continue to be one of the best performing banks in the country. Our stakeholders will be entirely justified in remaining bullish.