Deteriorating asset quality, muted loan demand and stress on the margins led to a sharp decline in the earnings of public sector banks in the July-September quarter. Bhaskar Sen, chairman and managing director of United Bank of India, discusses with Somasroy Chakraborty the challenges faced by state-run banks and shares his plan to tackle these. Edited excerpts:
Do you expect credit quality to weaken further, as the business and economic environment continues to remain uncertain?
We have seen the worst in terms of non-performing assets (NPAs). I don't think there is much scope for further deterioration in asset quality. Banks have become cautious in lending to high-risk sectors. At the same time, efforts are being made to improve loan recovery. In our bank we have given recovery targets to all regional offices and having video conferences almost daily to monitor the progress. I have personally written to the chief regional managers to step up recovery. We have also hired recovery agents. Borrowers understand, too, that for fresh loan sanctions, they need to repay existing debt. So, I expect credit quality to start improving from this quarter.
High provisioning (for NPAs) have led to a decline in profits of most state-run banks. Will the new provisioning norm continue to cap earnings growth?
The 75 basis points increase in restructured standard loan account provisions will definitely have some impact on our profitability. I cannot give you a number at this moment but we do expect some impact on earnings.
Is there scope for a sharp increase in your restructured loan portfolio?
We closed the July-September quarter with a Rs 4,200-crore restructured loan portfolio. By and large, we have completed restructuring of the big accounts that required attention. There might be an addition of Rs 400-500 crore in our restructured loan portfolio during the rest of this financial year.
Loan demand has been muted so far this financial year. Will you revise your credit growth target?
At the beginning of the year, we had forecast 20 per cent growth in our advances. We were on course at the end of the first quarter, when our year-on-year credit growth was 19 per cent. But during the second quarter, it slowed 13.7 per cent. While we expect demand to pick up in the second half of the financial year, we are revising our credit growth target. For 2012-13, it will not be more than 17 per cent. This is also because we are lending cautiously and avoiding exposure in risky sectors.
What is your outlook on interest rates? Where do you see your net interest margin (NIM) at the end of this financial year?
As long as inflation remains sticky, I don't think interest rates will come down. We have seen moderation in our NIM to 2.6 per cent in the July-September quarter. We expect marginal improvement in our margin, as our cost of deposits are expected to fall by 10-15 basis points. The share of bulk deposits in our total deposits is 12 per cent and there might be a further reduction in these. However, any significant improvement in NIM is unlikely, as yields on advances are also likely to moderate.