Karur Vysya Bank, one of the old-generation private sector banks in the country, doesn?t want to chase business simply to report big numbers. KVB, which will be celebrating its centenary in 2016, wants to complete the walk in measured steps. K Venkataraman, MD & CEO, tells Sajan C Kumar that whether there is a slowdown or uptick in the economy, the bank is focused on quality of its assets.

We are into the fourth quarter now. How have the last three quarters been in terms of performance vis-a-vis external economic conditions?

At the beginning of the financial year, things appeared slightly better and our confidence came from the fact that interest rates were moderating, thanks to measures taken by the RBI. We believed that growth would pick up during the year, specifically towards the end of the first quarter, as measures were taken by the RBI to control inflation.

However, the situation has not improved, it has worsened and interest rates have remained elevated. The RBI’s policy shift ? increasing the marginal standing facility (MSF) rate ? has increased the borrowing costs for banks and, thereby, triggered a rise in the system interest rates. We have taken a decision to absorb the higher costs of funds for the time being.

Is the bank?s Q3 performance reflective of the difficult situation since PAT has dropped by 5%?

There were two major reasons for the drop in profits. First, our interest income itself was lower and, second, even if there was a big upturn in the economy, we would have been cautious. If we hadn?t been so cautious, we would have reported a 20-25% growth, but given that the environment was worsening, we thought it better to go slow.

We have tightened our credit norms further and are not picking up medium-quality assets although high-quality assets fetch us lower margins. Our advances grew at a slower pace, our cost of funds also rose and, additionally, our employee costs have increased. We raised salaries by 10% and, therefore, the cost to income ratio has gone up.

What is your outlook for the near term?

The growth rate will remain the same, we have been growing at approximately 15%. Although last year we saw a good increase in the gold loan portfolio, there will be some slowdown this year due to the high price of the commodity and government curbs. Looking ahead, things could improve as some of the companies are again evaluating their expansion plans. In our case, a number of borrowers were not utilising their limits as they had scaled down operations, but they have now started looking for capital requirements. However, if interest rates are higher, there could be a problem. Post-elections, regardless of which party comes to power, we should see some stability and that should trigger demand in the system. It is a question of time.

What is the update on the proposed capital raising of R1,000 crore through a qualified institutional placement? The bank had also raised the investment limit for FIIs to 40%…

The board and shareholders have okayed the move for capital raising, but it is only an enabling resolution and, so, we may not raise money immediately. If the markets are good and the pricing is attractive, we will take a call. Our asset growth has not been as fast as anticipated and, therefore, we don?t need that much capital. To that extent, we are adequately capitalised as we have close to 12% of Tier-I capital. The FII limit has been raised to 40% because of the proposed QIP. Many foreign investors were interested, besides our existing investors investors who want to add to their stake.

KVB will be 100 years old in 2016. The bank had initiated a transformation plan based on the suggestions of consultancy firm Boston Consulting Group. Could you update us on this?

We took BCG?s help in identifying the transformational needs when we grow beyond a level. Given the complexity of the growth, a proper structure and control of our operations had to be put in place. The transformation exercise is going on, and I must say it is 60-70% complete. As part of the exercise, we have a built a platform for a higher level of growth in terms of risk management. Our spectrum of operations has been widened, we are training people and entering new and varied segments and geographies. It is also a sort of de-risking strategy.

Do you have any serious NPA problems?

Although we did have some slippages, especially in the third quarter, they are not alarming and our NPAs are manageable. The bank’ s gross NPA is 1.47% while the net NPA is 0.48%. As in the case of other banks, we too had some exposure to the so-called problematic segments such as infrastructure, but the loans could be recovered. We have increased our retail asset portfolio and we would like to increase our MSME portfolio to 37%. Right now, our focus is on the quality of assets.

How has the bank fared on the liabilities side? And what are your plans for new branches?

Our Casa has been growing although, as a share of deposits, there hasn?t been too much of an improvement. At the same time, term deposits are growing because we are offering attractive interest rates. We will be expanding our network taking into consideration the requirement of manpower, as we need experienced people. Although we are still to draw up the network expansion plan, we open on average 50-60 branches every year. For instance, we opened 100 branches last year, but we will close this fiscal with 25 new branches. Similarly, last year we recruited 800-900 people, but this fiscal we may end up hiring 500 or 600.

KVB is still known as a south-based bank. Do you want to be a pan-Indian bank?

We are slowly going pan-India, but we will

have a stronger presence in the south. In the north, we will be growing in clusters as we have captive customers there.