Kolkata-based UCO Bank is currently undergoing a major transformation and acquiring 2 lakh customers every month. In an exclusive interview with FE’s Kumud Das, UCO Bank chairman and managing director Arun Kaul says that deposit rates have softened since April this year as they are function of liquidity in the system and the credit demand.

The Reserve Bank of India has increased the interest rate on savings deposits to 4% from 3.5% earlier. How will it impact your bank?

Rather, they have been realigned with the market conditions. See, earlier the savings bank account was not attractive, rather a negative one. There was hindrance in the mobilising of deposits. For the urban consumer, a savings bank account acts as a transaction account. However, the same account turns to be a savings tool when it comes to the rural consumer. In other words, a savings bank account plays a major savings tool for the people living in the rural areas. Hence, the increase in the interest rates of such accounts is a welcome move by the RBI. Maybe it has come as a precursor for the deregulation of the savings rate altogether.

How do you view the key policy rate hikes and will it lead higher lending and deposit rates?

If I raise lending rates, it doesn’t mean I have to increase deposit rates, too. It all depends on the credit demand. In fact, deposit rates have softened since April as it is the function of liquidity in the system and the credit demand. Banks have started increasing their lending rates to protect their NIMs (net interest margins). Still, I do believe that NIMs could come under pressure. Right now, liquidity is comfortable.

Do you think the RBI will raise its key policy rates further?

There is an upward pressure on both inflation and interest rates. If the RBI further increases its key policy rates, it will purely be driven by oil prices and the behaviour of other commodity prices. By making credit costlier, the RBI is trying to manage the credit demand.

What kind of business growth you are projecting during the current fiscal?

My business growth is good. We are looking at a growth of 20% in the bank’s business during the current fiscal. While we are targeting a credit growth of 20%, at the same time we are also looking at a deposit growth of 18% during the current fiscal.

What are the sectors UCO Bank will focus on in the current fiscal?

There are couple of sectors we will focus on. There is good credit demand for agriculture and retail. We still see some demand coming from the infrastructure sector. UCO Bank as on March 31 has 10% of its credit exposure for infrastructure only and the balance is going to other sectors of corporate India. While SMEs (small and medium enterprises) comprised 10% of the bank’s entire loan book, agriculture comprises 15%. I would like my retail, SME and agriculture (exposure) to move up during the current fiscal. Also, 65% of the bank’s credit is corporate credit alone.

How do you see non-performing assets provisioning for your bank?

We are in the process of cleaning the balance sheet and we will focus on recovery. Our net NPA stands at 1.84% currently. We have done 70% provisioning as on 30 September, 2010. Now, our provision coverage ratio stands at 52%. Most of my bank’s NPA has happened during past two quarters. We have sold our NPAs to asset reconstruction companies.

What kind of branch expansion you are planning?

As of now, we have got 2,200 branches. We will fully comply with the recent RBI norm of having 25% of our new branches in the rural areas alone. We are planning to open 800 new branches by March, 2013.

What are the challenges for the bank going forward?

There are a couple of challenges before the bank. First, CASA (current account, savings account) has not improved. Secondly, customer acquisition was still low as the total number of savings accounts with the bank as of now stands at 1 crore. We are acquiring 2 lakh customers per month. Another challenge was quality of assets. We are focusing on recovery.

Also, we have appointed recovery agents as per board-approved policy. The government has already infused a sum of R940 crore into the bank in March and it has improved the bank’s capital adequacy ratio to 13.80%, and as a result I may not need any capital for the year.