Our Cost Of Funds Is Lowest In The Country

Updated: Oct 27 2002, 05:30am hrs
Banking sector is one of the few sectors going to the stock markets for raising funds. And the pundits are predicting a second round of shakeout in the industry soon. Jammu and Kashmir Bank (JKB) chairman MY Khan speaks to Abhijit Agrawal of The Financial Express regarding challenges facing the banking industry and the strategy being pursued by the bank to face competition. Excerpts.

Last fiscal was not particularly good for the economy, industrial output was low, export growth declined. Capital market and banking were rocked by wide-scale irregularities. There was nothing much for capital market investors to cheer about. However, the new fiscal has already seen successful initial public offers (IPO) and more are in the pipeline. Is this a good time to go for an IPO
In the last couple of IPOs, the response was very good. Punjab National Bank and Union Bank of India have done really well with healthy oversubscriptions. That means the response is there and this has encouraged many other banks and institutions to go for an IPO. I think it is the right time. Investors do not have many options available. They feel that even if they get 20-25 per cent dividend, that will be sufficient.

Will banks be able to command the right price if they go for an IPO at this point of time
Yes, price is a factor. It is not the same as it used to be four years back. The price has to be very reasonable. Thats how they will be able to attract the investors. Some of the banks had their own compulsions to go to the market and raise money. It is very good for the investors.

What are the alternative sources for raising money in the current market conditions
The other alternative is the secondary market but I think the reason why many banks have decided to go for an IPO is the response that IPOs are receiving. The response has been so good that that they would like to go for these IPOs.

What trends do you see for the banking sector in the near future
Times are going to be difficult. It is not going to be easy for the banks. There is a pressure on spreads, one has to understand that. But to come out of it, banks have to increase fee-based income, go for small loans and advances, as everyone is doing now and think of some alternate sources of income. With the economic situation improving, the credit offtake will also improve. In fact, it is bound to improve and the situation is not going to be the same. This year so far has been better than the last year, the credit offtake in the first six months has been much better than the last year. So the situation is improving but one has to look for alternate sources of income as there is going to be a pressure on the spreads and there is no doubt about that.

If banks such as JKB are going retail they will have to compete with large private banks such as ICICI Bank and HDFC Bank, with foreign banks in the metros and with state-run banks in the rest of the country. How do they seek to compete
Using the example of JKB we have our own strengths so far as the rural markets are concerned because in Jammu and Kashmir we are almost a monopoly. In Kashmir more than 90 per cent banking is done by JBK and in Jammu we account for more than 50 per cent. Talking about HDFC Bank, ICICI Bank, their presence is only in the metropolitan cities. Look at insurance, last year, according to LIC figures, their main business came from rural areas and that is true of the banks also. In metros, one has to face competition from new generation private banks and foreign banks but in rural areas state-run banks and banks such as JKB have that strength, as our branches are in the rural areas which are the biggest potential markets. The advantage that we at JKB have in particular is that our cost of funds is the lowest in the country. So we can lend to corporates at a very competitive price. Pricing of the loan has become a very important factor in the current times.

Do you see further consolidation in the industry
That is bound to be there. Mergers and acquisitions will take place and that is the order of the day. Otherwise many banks may not survive in the future. JKB has a monopolistic character in our market and we are the only bank that is a banker to the government so we dont need to merge with another bank. Other smaller banks will have to merge or their survival is going to be difficult. We have certain advantages which, we will continue to enjoy and we do not need inorganic growth. We may have strategic relationships with some south-based banks but it will be mainly from the business point of view but a merger is certainly not on the cards.

What specific steps has JKB taken to enhance shareholder value
We have diversified into new areas such as insurance and our target is to earn Rs 35 crore each from both the insurance businesses in five years. We have diversified into broking business with IL&FS and very soon, may be in the next few months, we will start our own mutual fund company. So we are diversifying into new areas and expanding into the rest of the country in a selective way. On the retail side we are giving added emphasis.

We have disbursed close to Rs 250 crore in the first six months of the fiscal by the way of personal and housing loans. Apart from growth of business every year we have increased our dividend payment. Year before last it was 40 per cent, last year it was 50 per cent and you should expect this trend to continue. And may be next year we could think of a rights and bonus issue. Its high time we should go for it.

What have been the initiatives of JKB in the current fiscal
We have made several new initiatives including Broking, Insurance distribution, Housing Loans and Securitisation of rentals and receivables under which, we have disbursed close to Rs 170 crore in the current fiscal so far. We have also tied-up with BSNL to route their tariff received in the state of Jammu and Kashmir through JKB. We are increasingly looking at fee income to shore up our bottomline.

What would you describe as the USP of your bank
Our service levels are very high. Other banks may talk of ATMs and they may say that customers should not come into the branch but we have a different approach. We wish that our customers visit the branch. Another strong point is that the decision making is very fast. That is why you will find that most of the corporates including blue chip companies and navratnas in the government sector are coming to JKB.