‘PSBs have shown consistent improvement in recent times’

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Anil K Khandelwal has been responsible for a major transformation of the state-owned Bank of Baroda from a stodgy public sector bank to one which is now technology-focused, customer-savvy and nimble-footed. During his tenure, BoB undertook a major rebranding exercise, on the lines of some of the best private sector and foreign banks. As he prepares to hang up his boots at the end of the month, Khandelwal shares his thoughts on the banking sector in India in an exclusive interview with Sourav Majumdar and Sitanshu Swain. Excerpts:

Banking has become very dynamic, competitive and volatile of late. How do you see the public sector banks (PSBs) tackling the emerging situation? What are the changes they need to make to maintain their leadership in the new environment?

The major disadvantage that the PSBs faced vis-à-vis new generation private as well as MNC banks was technological backwardness. However, most of them have made aggressive efforts in last few years to set up core banking networks, internet and mobile banking, etc. While they continue to have large branch networks, their ATM count has also increased considerably. Thanks to the regulatory compulsion of compliance with the Basel II framework, they invested large sums in improving risk management capabilities, especially credit scoring models and databases to manage operational risks.

They have also been raising capital either by diluting the government ownership (if there is a scope) or by way of upper tier II bonds, etc. All of them enjoy CRAR close to 12.0%. The Banks like Bank of Baroda, which have strong presence overseas are rapidly expanding their overseas presence to diversify the business and to make their balance sheet less vulnerable to any specific country’s downturn.

In order to consolidate their position in the market, they have been paying special and focused attention to improvement in marketing and customer centricity. Some of them have undertaken aggressive re-branding exercises to reposition themselves more firmly in the market.To summarise, by concentrating on cutting edge technology and risk management systems, by improving capital base, by developing marketing skills and customer service and by making a conscious effort to expand globally, the PSBs can maintain their leadership in the new environment.

2009 is just a year away. Are the PSBs ready for consolidation? What are BoB’s plans now?

Most of the PSBs have laid out concrete plans to undertake market-driven, synergy-based mergers once they receive the green signal from the government. Even Bank of Baroda has given sufficient thought to this issue. However, the “process” just cannot take place itself for PSBs. It does require legal changes like in the Banking Regulation Act and State Bank of India Act, etc. Unless these legal barriers are removed, no PSB can go ahead with its merger plan.

In the days of credit deceleration and rising cost of resources, do you think profits of the banks will take a hit and NPAs will rise?

A: Not at all. Profits are primarily the function of net interest margins (NIM), which banks earn as well as the non-interest income which they derive from treasury operations, fees, third party product distribution, etc. If banks price their deposit and loan products properly, even in a decelerating credit environment they can achieve a good level of NIMs. Given the buoyancy in financial markets, banks are well poised to increasing their earnings through treasury gains as well as fee-based income. Like in FY07 and FY08, banks are in a good position to maintain the earnings momentum in FY09 as well, provided they price their products smartly.

NPAs too need not rise if banks have proper due diligence system in place and if their boards/top managements do not allow excessive exposures to overheated sectors for want of short-term gains.

Do you think the private sector banks have fared better than the PSBs in recent times? If it does not merge with its associates, even SBI will be in danger of losing its leadership position…

This is too far-fetched. One sees consistent improvement in the performance of PSBs across all parameters in recent times. For instance, their gross profits as a percentage of total assets has improved from 1.34% in 2000-01 to 1.73% in 2006-07. Operating expenses as a percentage of total assets have come down from 2.72% in 2000-01 to 1.77% in 2006-07. Net NPAs as a percentage of total assets have also come down from 1.93% in 2002-03 to 0.62% in 2006-07. CRAR has improved from 11.20% in 2000-01 to 12.36% in 200607.

The only area where they are weaker compared to their private peers is the area of “fee-based” income. However, this weakness will not continue for very long as many of them have proactively selected partners for life insurance, asset management business, etc. in recent times. This, accompanied with their migration to new platforms, has opened up many new avenues for them to generate fee-based incomes.

How do you see the PSBs meeting their massive resource requirements for their future growth?

Though the prescribed regulatory capital requirement for banks in India is only 9%, PSBs have been maintaining their capital-to-risk weighted asset ratios of 12%. However, most banks expect capital to fall below 12% after migrating to Basel II.

While banks for whom there is sufficient headroom left in Tier 1 capital (through the equity route) will raise equity, the others would raise upper Tier I bonds up to 15% of their equity capital and another 100% of their Tier I capital can be raised through debt. For large banks like Bank of Baroda, it is not a serious issue as every year it can raise additional capital by ploughing back its large profits into Tier I as capital. However, in the long run, government’s ownership in PSBs could be diluted in a gradual manner by defining some roadmap.

What are your views on the proposed holding companies for banks and RBI’s draft paper on it?

In India, home-grown banking companies, which are on their way to becoming conglomerates need capital and I feel an intermediate holding company could be a good option.

Such company can be an NBFC or a pure investment company, under the full supervision and regulation of RBI. However, if it is not regulated by the RBI then it could develop potential risks. So banks need to discuss how to overcome the concerns expressed by the RBI.

How are you trying to make BoB a global bank? Are you looking for an overseas acquisition?

BoB has been a global or international bank of India for more than 50 years. Today, we have presence in 23 countries with 67 offices. In the financial year 2007-08, I had promised our stakeholders that I will open 10 new overseas offices and I am fulfilling that promise. I consider our international operations as our main comparative advantage as it contributes 20% to our total business, its cost-income ratio is half of our cost-income ratio in India and its net NPLs are zero. We are gradually concentrating more on local population in our overseas territories and loan syndication business there is fast replacing our trade finance business thus increasing our spreads.

You have laid enormous emphasis on HR during your tenure. What are the future areas of autonomy (including in HR) you want to see to make PSBs more powerful institutions?

Autonomy in recruitment of people and deciding about their packages. Autonomy in closing down loss-making rural branches. Autonomy in inducting more number of independent directors on the board.