Deteriorating asset quality, muted loan demand and stress on margins have led to sharp decline in earnings of public sector banks in 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 them. Edited excerpts:
Do you expect credit quality to weaken further as business and economic environment continues to remain uncertain?
We have seen the worst in terms on non-performing assets. 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. For instance, in our bank we have given recovery targets to all the regional offices. We are having video conferences almost on a daily basis to monitor the progress. I have personally written letters to chief regional managers, asking them to step up recovery efforts. We have also hired recovery agents. Borrowers also understand that in order to avail fresh loan sanctions they need to repay their existing loans. So, I expect credit quality to start improving from this quarter.
High provisions have led to 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 our earnings.
Is there a scope of sharp increase in your restructured loan portfolio?
We closed July-September quarter with Rs 4,200 crore restructured loan portfolio. By and large we have completed restructuring of the big accounts that required attention. There may be 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% growth in our advances. We were on course at the end of the first quarter when our year-on-year credit growth was 19%. But during the second quarter it slowed down to 13.7%. 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%. This is also because we are lending cautiously and avoiding having exposure to risky sectors.
What is your outlook on interest rate? Where do you see your net interest margin 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 net interest margin to 2.60% in 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 currently at 12% and there may be further reduction in these deposits. However, any significant improvement in net interest margin is unlikely as yields on advances are also likely to moderate.
