Bank of Baroda is rejigging its balance-sheet and will focus on clients with whom it can forge a long-term and diversified relationship, says P S Jayakumar, managing director and CEO.
Bank of Baroda is rejigging its balance-sheet and will focus on clients with whom it can forge a long-term and diversified relationship, says P S Jayakumar, managing director and CEO. Jayakumar hopes to grow the loan book by about 10-15% this year. He tells that it is probably more rewarding to be a single lender to smaller firms than part of a larger consortium and believes there’s an opportunity to do this in the current environment.
Your balance-sheet has shrunk…
We haven’t shrunk our balance-sheet but, yes, have let go of certain assets and that’s something any institution has to do. Losing those assets has not exactly made us any worse. We are being measured by ratios like gross non-performing assets (GNPA) to this and net NPA to that, it is the elevation that is being looked at. But, really the focus should be on the absolute uncovered provisions.
Just because you put on more assets, does not mean the risk has disappeared. So we are not shrinking but rejigging the balance-sheet and the principal approach is that whatever lending we do, must be to clients with whom we have long-term and diversified relationships. Just participating in syndication or taking a sliver of credit that is distributed does not work any more for us. There are some transactions we would never get to, like handling their operations accounts; so, it is better to leave that and focus where you can make an impact. We want more sensible, stronger relationships and we also want to invest more time in them rather than just buying something because the credit-spreads look good.
Are you seeing demand for credit?
This year, we are looking at growing our balance-sheet by 5-10% . But we must show what are the things we are running off and why and what is the core-growth. We are seeing some demand from ports, roads and different kinds of logistics hubs. There seems to be some push in renewable energy and also incremental requirement in fertilisers and we expect farm equipments to pick up pace.
At the end of the day, our credit growth need not necessarily be tied to the credit growth of the industry because there is always an opportunity to acquire market-share. Some customers, with 12 or more consortium members, are also beginning to feel that some of these large consortia are dysfunctional. So, there is some consolidation. This means that a single relationship, with a deeper balance-sheet or with fewer number of people can be more effective than dealing with many.
But isn’t it important and useful to be lenders to large corporates?
We don’t necessarily have to deal with large companies because we also have our own prudential lending limitations. But there are many companies which are not the most big names in town but are very good as well and are probably going to be there one day. Those are the stories we are pursuing and if you really look back at BoB’s story, there are so many companies where we have funded 20,000 dirhams or the first R2 lakh and now they are large institutions—the bedrock of our balance-sheet. We are looking at pharma companies and ancillaries who have a R3,000-crore kind of funding requirement and where we can take two-thirds or all of it.
We are not going to be focusing on large steel companies where we have a sliver of share and, therefore, our voice and influence is very low. We don’t see a reason to continue with that. But, it is difficult to move out of those exposures because many of the credits are not exactly in a great shape for someone to take them over.
What are your thoughts on selling loans to ARCs?
This ARC is something we need to think about carefully. If it is going to be just security receipts and no real transactions, and we keep paying some fees, then that is a method of managing the optics of NPAs. We would love to sell the loan down but many of them do not have the capital to buy. But there are some bigger players who are coming in and there will be more opportunities. There also needs to be a meaningful return expectation for them as well and, in a public sector context, if the transaction is seen as very unfavourable, it raises other questions. So, we will have to be rational.
So, what will be your approach to exiting exposures?
As far as the large consortia are concerned, exits will be driven by others as we represent a small sliver. We are focused on these transactions only where we have a centrality of relationship. For a long time, BoB had an approach of not giving more than R2,000 crore to any single firm which, in hindsight, seems to have been a very sensible proposition. It just means that one person cannot hold you up. So, for example if company A from the steel sector fails, it is not that we have got R5,000-10,000 crore of exposure to them.
Haircuts would vary, but it is all part of the negotiations. As far as we are concerned, if the levels of pricing requires us to take a haircut of 30-40%, we would take it, because if that is the reality, it is. The only thing is to make sure we have done a proper exercise so that when we look back at the transaction we can say that we have applied all the mind we could on resolving it.
How are you changing the way BoB acquires new loans?
We have made a radical change in pricing and are using a more contemporary model. We are no longer imposing a margin of 2% or 1.5% over the base rate on our relationship managers. We are setting some simple rules which will enable them to engage with the customers more deeply and get a larger relationship so long as the net interest margins are north of 3%.
The second thing we watch is whether, on a pre-tax basis, the risk-adjusted return comes to 20%, and within that context, we can work it out. As part of the transformation process, we want to reorganise the corporate bank in two ways. Firstly, by defining the metrics of the relationship such that there are dedicated relationship managers and redefined metrics. On the credit-side, we earlier had an organisation of credit that was geographically-based. Now, we have moved into a sector-specialised approach. So, a person who is underwriting a renewable energy transaction, underwrites all renewable energy transactions. That way, we are also able to tell which are the good guys and which are the bad. The third thing is a mechanism to roll out an account planning whereby we have a reasonably good measure of the wallet of the client with respect to financial payments. The fourth element is that we are rolling out cash management and transaction banking which was not really deeply present.
The share of loans rated A and above has been falling since FY15. Why has that happened?
Those are historical exposures that are going to remain with us. There is no obsession with a AAA or a AA. There is a necessity of it being a higher investment grade of A and above or a B+ that will become an A. The important thing is to feel secure about the credit—sometimes, the more time you spend on it, you start looking at it differently. We have gone out to finance companies that are in the CDR because we can see the turnaround so manifestly clear. So, I don’t think it is an issue of saying we need AAA or AA and is not a strategy of addressing risk by putting some labels on them. This is a strategy of understanding businesses and customers deeply enough and building some mechanisms whereby you think the risks are well-handled.