Union Bank of India recorded an average annual growth rate of over 25 per cent in business and 23 per cent in profit in the last five years. But in the last two quarters, the non-performing assets have gone up.
In an interview to Business Line Mr M.V. Nair, who will be completing his five-year term as Chairman and Managing Director of the bank in March, talks about his achievements and explains why the bank's NPAs are high.
Have you achieved everything that you planned since you took charge of the bank?
I had a five-year term and a clear plan. After I took charge, I had made an assessment of the bank. It was consistently growing. But the challenge was to prepare it for the next 20 years and for a high level growth. Being a public sector bank, it needed a complete transformation. It took me about one year to figure out how to do it.
Our team prepared a transformation plan. We focused on technology and the entire process. We re-branded our services. We looked at changing the age profile of our staff. It's now a completely transformed bank. Profitability has seen a substantial increase. Our cost-to-income ratio has come down from 48 per cent to 40 per cent.
Your NPAs have been growing. Why?
We had already projected that NPAs will peak during Q2 of 2010-11. Thereafter, NPA levels are expected to improve. The main reasons for slippages during the second quarter are Agricultural Debt Waiver and Relief Scheme, which came to an end in June. The farmers could not take benefits of the scheme and failed to pay their share of dues and hence around Rs 400 crore has turned NPAs during the quarter. Secondly, few big accounts having international business became NPAs during the quarter which resulted in slippages to the tune of Rs 300 crore. These are all one-time exceptional events and shall not have any repeat impact.
We also started identifying the NPAs through core banking solution. There were some additions to NPAs from restructured accounts also. However, such NPAs accounted for 11.34 per cent of total restructured advances, which is within our guidance of 15 per cent. All these aspects put together resulted in an increase in NPAs.
But we have geared up for recovery and upgradation due to which our NPAs are likely to reduce from 2.79 per cent in September 2010 to 2.30 per cent by March 2011. In the next financial year, our NPAs position will show marked improvement.
Are your overseas plans on track?
Our full-fledged overseas branch in Kong Hong was opened in 2008. In a span of two years the branch has crossed business-mix of $1 billion. We made a profit in first year itself. The business is mainly from Indian corporates and trade finance requirements.
We are planning our second full fledged branch in Antwerp, Belgium. We have a representative office in Dubai, from where we cover GCC and African region. In West Asia, we have entered into tie-ups with exchange companies and mobilised 84,000 NRI accounts.
We propose to convert the representative office in London to a subsidiary. We are opening representative offices in Toronto and Johannesburg. Right now, overseas operations are 2 per cent of the balance sheet. Our plan is to increase it to 3.5 per cent by 2012 and close to 20 per cent by 2020.
How much capital have you asked from the government?
We have asked for around Rs 1,600 crore. We should be able to get it through a preferential issue. The Government holding can go up from 55 per cent to around 60 per cent. Then, we have two possibilities. We can either go for a rights issue, or follow-on public offer as and when required. Capital adequacy could go above 13 per cent, which should give us an elbow room for the next two-three years.
Is credit growth a challenge?
The Reserve Bank of India's guidance is that credit will grow at 20 per cent and deposit at 18 per cent. As on October 29, deposit growth is at 18.5 per cent and credit at 22 per cent. Both projections are broadly in line now. But the busy season has just started. If the trend continues, achieving 20 per cent growth in credit by March is not a concern. The only point of concern is that last year, in the second half credit growth was high. This year, growth has to happen on a base which was high. The environment supports credit growth — IIP numbers were good, vehicle sales are high, consumer durables sales are good. Festive season should support growth in credit.
When are you launching wealth management services?
We are in discussions with two or three players for wealth management. We want to launch it after we launch our mutual fund business through Union KBC Asset Management Company. Mutual Funds will be launched by December. We are waiting for final approval from the Securities and Exchange Board of India.
You talked about HR initiatives. What is the impact?
Thanks to fast track promotions, the average employee age has come down to 45 years from 50 in just five years. It may come down to 40 by 2012. We have appointed consultancy firm Hewitt to look at performance management system. We are looking at key result areas for 200 important positions. Based on their recommendations, we will form performance incentive scheme and career progression and succession planning scheme.
Do you expect a slowdown in housing loans after the latest RBI prescriptions?
I don't think so. There is a genuine need for housing in India and demand is quite obvious. The trend of growth in individual housing loans is also good. However, the regulator has to be forward looking. The RBI's concern is on need for banks to be transparent with the customers about interest rates and to understand the repaying capacity of the borrower at normal lending rate.
Similarly, low margin-based housing loans are being offered by some entities. This has led to stipulation for maximum loan-to-value ratio (LTV) at 80 per cent. In fact, majority of housing loans by Indian banks is around this LTV. But as I said, the RBI has to have a forward looking approach. Even if these prescriptions lead to some firming up in interest rates on housing loans, its demand may not be impacted. Nonetheless, housing prices are a concern, particularly in Tier-I cities where rising trend is observed.
The RBI has allowed additional LAF window for a month. Will it help ease the liquidity situation?
The RBI had announced temporary liquidity easing measures which were effective up to November 7. After this, net LAF outstanding amount again increased to a level beyond the RBI's comfort zone. In the recent policy, the RBI has indicated comfort zone of liquidity as (+/-) one per cent of net demand and time liabilities of banks, which comes close to Rs 52,000 crore. Current borrowing through LAF window is almost twice the comfort zone on the deficit side. Therefore, re-introduction of liquidity easing measures is a welcome move. Particularly, extension up to December 16 is positive for the market sentiment as it also covers the period of third quarter advance tax outflows. As an immediate market reaction, we have seen call rates coming down. There is huge government balances with the RBI (Rs 77,736 crore as of October 30) and the system may see the positive impact as the government starts drawing down its balances
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