Management Discussion and Analysis
Global Economic Environment
The global economic environment remained challenging for third straight year in 2013.Global output growth remained flat at 3% in 2013 compared to 3.1% in 2012. However, theglobal economic scenario turned better during the second half of 2013 recording a growthof 3.66% compared with 2.66% growth during the first half of 2013.
Advanced Economies: Growth in Advanced Economies (AEs) remained stagnant at 1.4% in2013 compared to 1.3% in 2012.
Among AEs, U.S. economy grew at 1.9% in 2013, led by healthy domestic demand, exportgrowth and employment growth. Improvement in economic condition in US created space forfiscal consolidation in the form of Quantitative Easing. (QE)
In the stressed European Union economies (EU), growth remained fragile as high debt andfinancial fragmentation held back domestic demand and thus industrial growth. However,growth scenario in the European Union improved marginally from (-) 0.7% in 2012 to (-)0.4% in 2013.
Emerging Market and Developing Economies: The Emerging Market & DevelopingEconomies (EMDEs) recorded growth of 4.7% in 2013 a tad lower than 4.9% in 2012. Recoveryin large EMDEs stayed moderate because of supply side constraints, tight monetary policiesand tightening of financial conditions with tapering by US.
Economic activity in Asia picked up speed in the second half of 2013, as exports toadvanced economies accelerated. Exports, particularly to the United States and the euroarea, have gained momentum. After initial weakness, China managed to regain its growthmomentum in the second half of 2013 led by government-led investment and achieved growthof 4.7% in 2013.
Japan recorded a healthy GDP growth of 1.7% in 2013 driven by government ledinvestment, robust domestic demand and late revival of global demand conditions.
To sum up, considering gradual revival of EU, US and some developing countries,International Monetary Fund (IMF) has projected a better global economic growth of 3.7% in2014. However, downside risks to global growth still persist. Policymakers in advancedeconomies need to avoid a premature withdrawal of monetary accommodation. In anenvironment of continued fiscal consolidation, still-large output gaps, and very lowinflation, monetary policy should remain accommodative. Similarly, in Emerging Market& Developing Economies, the policy makers need to tackle high inflation, fiscaldeficit and currency volatility. These measures will infuse investors confidence andthen promote economic growth in EMDEs.
Domestic Economic Environment
Indian economy entered into its third straight year of economic deceleration inFinancial Year 2013-14. Gross Domestic Product (GDP) of the country decelerated to 4.5% inFY13 from 8.40% in FY11. The downward spiral of growth impeded investmentactivities which had profound effect on Indias potential growth. Growth concernsremain significant with Index of Industrial Production (IIP) growth stagnating for twosuccessive years. The IIP growth for FY14 stands at (-) 0.1% compared with 1.1%during the same period in the previous year. Legal turbulence involving mining sector notonly damaged output of the sector but also affected other sectors by disrupting supply offuel and power. Stalled projects, prevalence of high inflation and resultant elevatedlevel of inflation combined with subdued consumption demand in India and abroad haveresulted in a low industrial growth in FY14.
Amid environment of weak manufacturing growth, it is the reasonable growth inagriculture and services sector that pushed up the GDP growth in second and third quarterof FY14 to a respectable level of 4.8% & 4.7% respectively.
The second half (H2) of FY14 witnessed proactive monetary and fiscal managementby authorities in sync with each other resulting in deficit targets (Current Account andFiscal Deficit) being largely met.
Inflation remained elevated throughout the financial year keeping interest rates upacross all the market segments. Supply-side shocks to inflation from food articles havebecome frequent and price rise cycles are getting elongated.
Durable recovery in the economy remains contingent on addressing persistently highinflation, and removing bottlenecks facing the mining and infrastructure sectors.
The banking industry witnessed a challenging time during 2013-14 like that of theeconomy. Liquidity condition remained tight in the banking system throughout the financialyear. Further, intensive liquidity tightening measures were resorted to rein in exchangerate volatility in July 2013 by increasing the Marginal Standing Facility (MSF) rate,increasing ceiling on daily maintenance of Cash Reserve Ratio (CRR) and curtailingliquidity available under the Liquidity Adjustment Facility (LAF) repo window. Whiledeliberately keeping liquidity tight, banks were enabled to avail the funds via term repowindow of various tenures & MSF at a higher interest rate for better transmission ofmonetary policy measures.
With a view to contain inflation, the repo rate was hiked by 75 bps in three tranchesduring FY14. Tight liquidity, high inflation and high repo rate, resulted in keepingyields of G- Sec across all maturities at an elevated level. This caused huge Marked to
Market (MTM) losses to the banks. However, Reserve Bank of India allowed banks toamortize the MTM losses spread equally over the three quarters of FY14. At the sametime, RBI also allowed banks to maintain Held to Maturity (HTM) category bonds at 24.5% asagainst the earlier decision to bring it down to 23% by March14, transfer securitiesqualifying for Statutory Liquidity Ratio (SLR) holding to the HTM category from Availablefor Sale (AFS) category and one time option to value those securities according to theyield on July 15, 2013.
Asset quality continues to be a major concern for Scheduled Commercial Banks (SCBs).The Gross Non-Performing Assets (GNPA) ratio of SCBs increased to 4.2 % as at endSeptember 2013 from 3.4 % of March 2013. The restructured standard advances also increasedto 6.0 % of total advances as at end September 2013 from 5.8% of March 2013. Overall thestressed advances rose significantly to 10.2% of total advances as at end September 2013from 9.2 % of March 2013.
Indian banks in FY14 adopted Basel III norms w.e.f. 01.04.2013 to strengthentheir risk management practices and resilience. However, extended economic slowdown posedchallenges to banks profitability and raising the additional capital to meet BaselIII requirements. Hence, Reserve Bank of India, on 27th March 2014 extended the transitionperiod for full implementation of Basel-III Regulations in India by one year from March31, 2018 to March 31, 2019, closer to the internationally agreed date of January 1, 2019.
Going ahead, as the economy is poised to bounce back to the growth path, businessenvironment is expected to improve in FY 2014-15.
Strategy for the year ahead
The year bygone was full of challenges on the Domestic and Global fronts. The GDPgrowth decelerated and reached 4.9%. The business confidence in the market was low. Duringthese testing times the way we approach the problem is what makes the difference. Withchanging times, there was a conscious change in direction of credit from corporate toconventional sectors of the economy viz. Retail, Agriculture and MSMEs.
The Bank changed the growth trajectory towards optimizing size and working forincreased strength through low cost deposits, less risky advances and more profitablebusiness from the grassroots.
Nevertheless, the approach proved fruitful, the year ended FY'14 saw all the majorparameters viz. Business (YoY 14.3%), Assets (YoY 14.9%), Deposits (YoY 15.3%) and Credit(YoY 13.1%) growing in double digit.
The direction of the growth was qualitative rather than quantitative. The approach wasto target low risk and profitable business since this was a segment which was leastaffected by the slowdown. From corporate business the focus shifted to grass root businessthrough branches.
Since economic deceleration impact equally all the sections and it is the approach thatmakes the difference the banks approach proved rewarding. The controlled growthresulted in highest operating profit for the bank amongst the nationalized banks.
The only worry emanating was on the asset quality front. There are strong linkagesbetween macroeconomic aggregates such as growth slowdown on the one hand and higher NPAlevels on the other. The Gross NPA and Net NPA ratios reached 5.25% and 2.85% inFY14. However once we identify the challenge, it is only our timely action andapproach that enable us to initiate remedial measures.
The Bank took this up as a challenge and launched a "Special NPA ReductionCampaign" from 01.12.13 to 31.03.2014. The campaigns progress was monitored ondaily basis. Besides this the Bank implemented a regular staff Incentive Scheme called"Prayaas" to promote recovery in NPAs and written off accounts. The upgradedaccounts moved up from Rs. 962 crore to Rs. 1429 crore. However fresh slippages have putpressure on asset quality as a result NPA has increased.
The Bank has launched a series of steps to ensure that under the improving environmentthe maximum benefits can be reaped. The notable amongst them are PNB Pragati initiative,Pragati Productivity Points (PPP) system, MSME growth initiative was launched in 250branches in Jan14 to reduce the turnaround time to 2-4 weeks and grow MSME portfolioby 30% from Dec13 to Dec14. The Bank has also put a Kiosk Banking solution(KBS) by which FIcustomers can access all basic banking servcies required by them at BClocation, FIcustomers can also transact on ATMs and Merchant POS outlets. In the area ofRisk Management, the Bank availed the service of M/s KPMG for carrying out the externalaudit of risk management systems. Various IT products have been developed to make workingmore comprehensive and easy e.g. Kiosk Banking Solution, Automation of Fund TransferOrders, HORTNET Project for Maharashtra, XOOM RDA (Rupee Drawing Arrangement andBureau one.
The Bank would continue to remain innovative and align its business processes withchanging times. Although the focus will remain on the grass roots emphasis will be thereto expand in the sectors which would now grow under improved economic conditions.
In the second half of the year efforts towards growth may accelerate further and willassertively implement the strategies of quality credit, low cost deposits, increase innon-interest income, containing expenditure and reduction in NPAs.
In this back drop the Bank has setup the roadmap for growth combined with improvementin asset quality so that Quality and Profitability proceed hand in hand. "Profitablegrowth from the grassroots" is the core strategy of the Bank for FY15.