Banks to continue good run with caution and innovation, say PSB CEOs

Indian banking is expected to continue its good run on the back of solid economic growth and fundamentals, said leaders of four public-sector banks at the Business Standard BFSI Insight Summit in November in Mumbai. Ashwani Kumar, managing director (MD) and chief executive officer (CEO) of UCO Bank; Debadatta Chand, MD and CEO of Bank of Baroda; K Satyanarayana Raju, MD and CEO of Canara Bank; and Shanti Lal Jain, CEO of Indian Bank, spoke about customers, growth and innovation in a panel discussion called 'Is the Goldilocks moment behind the PSU banks?' In the discussion moderated by Business Standard Consulting Editor Tamal Bandyopadhyay, the bankers also discussed risk management and underwriting standards. Edited excerpts: 

Liability costs are going up for banks with high CD (credit-deposit) ratios. There has been a slowdown in the past quarter in credit growth. Is the best behind for the banking sector, and is the cycle slowly changing? 

Chand: The economy is very strong and on sound footing and we, as banks, typically mirror the economy. Because the economic scenario is so good, banks are in very good shape. But coming to the question of whether it would sustain, yes, I believe it would sustain. We have seen globally that the good part of the cycle stays for a longer time. And this is true for the Indian banking scenario. The digital orientation of all banks has strengthened. Underwriting processes have been strengthened significantly for the last many years now. 

There is talk of margin squeeze because of the cost of deposits. Banks have been managing asset liability, particularly on the interest rate side for years now. The bank's ALM (asset liability management) profile will help us manage the margin well. The banking sector would be in the sweet spot going forward. 

You see the cycle not changing. Mr Jain, over to you 

  Jain: Banks basically mirror the economy. We have heard from the Governor of the Reserve Bank of India (RBI) that the GDP growth is solid and growing, and there are a lot of opportunities in the economy for growth in all sectors. The income level of citizens is increasing. We have seen growth in real estate, automobiles. Banks are also working on financial inclusions, funding the unfunded. Banks will continue to grow. Secondly, the quality of the lending is becoming better and better with gross NPAs (non-performing assets) coming to historic lows. Underwriting has improved. We are passing through a cycle when the interest rates will start to cut down, maybe not in this quarter, from the next. Good days are ahead but we should be very cautious. 

Both of you feel that good times are going to continue. What is your take, Mr Kumar? 

  Kumar: The good time has started and it is going to be there for a long time. Banks are in the pink of their health. Gross NPAs have come down drastically to a decadal low, ROAs (return on assets) is improving, NIM (net interest margin) is also continuously improving. Banks are also inventing new ways of lending by using data analytics. New innovative products are being offered to our customers; consumer protection is at the core of banking now. Going forward, we need to be cautious about underwriting standards, which we have improved over the years. With the advent of new products, we need to improve our risk management practices. Every bank has to take risks based on its appetite. With these cautions, good days are going to be there.

  All three have the same opinion: Good days here to stay. Mr Raju? 

  Raju: The position public sector banks have achieved is not just an overnight journey. For the last 10 years, all stakeholders – the Reserve Bank, the government and individual boards and top management of banks – have worked hard on their weaknesses. Ten years back, the weaknesses were plenty. They were not able to invest heavily in technology to match market needs. Underwriting standards were not so comfortable, and their capital position was so low. Now, there is no gap in technology. Talent is there. We at Canara Bank have a very close connection with the RBI Innovation Hub. Public sector banks are now in line with the private sector or competing peer banks. When the government ensures a  7 per cent growth, banks will grow in double digits at 10-12 per cent. 

All of you believe that the worst is behind. That there is no difference between public and private sector banks... 

  Raju: Don't say that there is no difference between public and private sector banks. Sixty per cent of our energy is spent on social banking. We have twin regulators. We have to work for our owners' objectives. We are answerable to many constitutional bodies and these restrictions may not be there on the other side. When we are comparing the two parties, ground rules should be the same for both. 

There has been a structural shift in the public sector banks balance sheet over the last decade. And there are concerns about unsecured credit. 

Raju: The regulator’s advice always has to be taken in a positive spirit. At Canara Bank, we sanction personal loans only to the salaried class and pensioners who draw their salaries and pensions through our bank. Our slippages are very meagre.

Kumar: The Reserve Bank has certain reasons to come out with advisories. At UCO Bank, we are not in the process of giving personal loans to everyone who applies. It is (loans) data driven. Delinquencies over a period of last two or three years are less than 1 per cent. 

Jain: Two things you asked: One is structural shift. From my bank's perspective, when we got amalgamated we had 55 per cent retail (loans) and 45 per cent corporate. Now, we have close to 63 per cent RAM: Retail, agriculture, MSME – and 37 per cent is corporate. Margins and customer base have improved. We have a good customer profile: 1.4 per cent of my total book is unsecured, so we are not seeing much of an issue there. 

Chand: There is an elevated level of slippages but is that significant? Clearly, the answer is no because the book is so small. 

The RBI's concern is more from the system as a whole, rather than any bank specific on the matter.