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“There is pressure on Indian banks to consolidate”
Dr. Rupa Rege Nitsure, Chief Economist of Bank of Baroda talks to B&E on whether Indian banks are ready for tough days ahead
Issue Date - 10/11/2011
B&E: Is the Indian banking industry in a position to grow and survive if the economic scenario deteriorates further and if recession strikes the Indian and global economy?
Dr. Rupa Rege Nitsure (DRRN): In the global context, India is the second fastest growing economy (vis-à-vis other large-sized economies) and has a well-balanced economic structure. It is not highly dependent either on foreign financing or foreign demand, as some other countries are. And its banking sector is well capitalised and enjoys a strong deposit franchise. Moreover, the Reserve Bank of India did demonstrate a high degree of flexibility and responsiveness during the last global financial meltdown. So even if the economic scenario worsens, our banking industry and its regulators are in a position to handle the situation well.

B&E: But NPAs are a concern – you cant deny that. How serious a concern are NPAs for Indian banks at this point of time as per you?
DRRN: Banks always see some growth in their NPAs during cyclical downturns and that cannot be ruled out this time also. However, no alarming signals are visible as of today. The Indian banking industry’s gross NPAs stood at 2.3% during 2010-11 and rating agencies & banking analysts expect this to grow by 3 percentage points in the current financial year, which is quite reasonable in the current phase of high inflation and interest rates. So honestly, NPAs are not a big concern.

B&E: Do you believe that new banking licenses can play a significant role in achieving complete financial inclusion?
DRRN: That may not happen automatically. The RBI will have to actively administer in order to ensure that new private banks play their contributory role in the mammoth task of financial inclusion. Without an active policy intervention, this “objective” cannot be met. Going by the experience so far, it is a misnomer to think that unbanked areas and disadvantaged sections would be served by the newest of the private banks.

B&E: At 20.2%, Bank of Baroda has posted a reasonable y-o-y rise in profit during the last quarter, which amounted to Rs.10.33 billion along with a 23.6% rise in net interest income. But considering that forecasts for the Indian economy is appearing more and more discouraging by the month, on what note do you expect to end the current financial year?
DRRN: Given the bank’s well-diversified domestic and international loanbook, modest exposure to sensitive sectors, relatively higher proportion of low-cost (CASA) deposits, good traction of fee-based income and lowest incremental delinquency ratios (in the Indian banking sector) for the past several quarters, we are confident to end the current financial year successfully, and consistent with our past performance.
B&E: NPAs don’t worry you. Even a slowing economy doesn’t. Then what does? Isn’t there something which Bank of Baroda is concerned about?
DRRN: The bank does not have any concern intrinsic to its own operations. But uncertain economic situation and volatility in financial markets are enough concerns for any banking entity to remain vigilant and responsive to early warning signals. So we are not immune to turmoil in the macroeconomic scenario – both domestic and global. No one entity is.

B&E: The bank’s total business expanded by 23.9% (y-o-y) to Rs.5.45 trillion in Q1FY2012. Doesn’t such a financial performance set you thinking of plans for further business expansion? Also, how do you plan to retain the current margin levels?
DRRN: The bank’s business focus in the past few years has been “Sustainable growth with a focus on quality”. Hence, the key focal point for us is to give an acceptable “Return on Average Assets” to all our stakeholders, than concentrate on and worry about “size”. We have been managing our profit margin well through better Current Account-Savings Account (CASA) mobilisation, prudent pricing of retail term deposits, efficient pricing of loans and minimisation of credit costs.

B&E: How important is the retail banking business to Bank of Baroda? How much does retail banking contribute to the bank’s annual revenues?
DRRN: For any bank in a country like India which has a strong demographic profile, retail banking is a major growth driver. In the bank’s domestic credit book, the share of retail loans has always remained between 18.0% to 20.0% for the last seven-eight years. The yield on retail advances is also relatively higher and to that extent it is definitely a strong value proposition. However, given the Bank’s thrust on “diversification”, the Bank has avoided the temptation of growing aggressively in any one direction. So we may not become the biggest retail players, but we will definitely be amongst the strongest in this respect.

B&E: Which sectors will play a role in accelerating the growth of the Indian banking industry in near future?
DRRN: The Indian banking industry will see good growth opportunities in agriculture & agro-based industries and in sectors like pharmaceuticals, food processing and services, in near future. However, from a long term perspective, the infrastructure sector will continue to be the main growth driver.


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