The Reserve Bank of India (RBI) has come out with the much awaited norms for new banking licenses. Entities from both the private and public sector shall be eligible to set up a bank through a wholly-owned non-operative financial holding company (NOFHC), according to the new guidelines.
Rana Kapoor, Founder & CEO of Yes Bank believes there are diverse opportunities in the banking and financial landscape of our country and therefore, the new banking licenses must set up differentiated business models to cater to under-served areas. Besides, he also feels that consolidation within banking is likely to take time.
Kapoor further added that despite strong growth, their market share is still constrained and they would continue to adopt a cautious stance in 2013-14. Yes Bank’s retail operations have been revamped and it is likely to improve their revenue, informed the CEO. Moreover, Kapoor expects FDI to help contain the current account deficit.
Here is the edited transcript of the interview on CNBC-TV18.
Q: How do you think the new bank licences will pan out? Do you think this time around if people with deep pockets are going to get the licences you are going to see more merger and acquisition (M&A) activity than we saw up until now?
A: My sense is that, given the opportunity to diversify the banking and financial landscape in our country, new bank licensing will have to have differentiated business and financial models. These, in all probabilities, will have to hover around financial inclusion in underbanked and unbanked areas.
My sense is that, with India’s overall under penetration in banking, a large part of the population is under served and more than 50 percent is financially excluded. Hence, new banks will have to create differentiation, to be somewhat creative.
Q: Will they be profitable? You would know better than anyone else that lending from tier III to tier VI cities will actually be a social responsibility than being a commercially viable option?
A: I think in the long haul it is also an opportunity, if there is application of newer technologies, if there is an outreach because the reach and depth of Indian banking needs to widen and deepen. New bank models will have to focus on that.
On the question of profitability, with the good mix of metro urban and the opportunity in rural banking, my sense is that models will take a while to become profitable but, at the same time India is a great opportunity.
If one looks at the M&A question, personally I believe there is a school of thought in India which thinks the systemic risk of our country's banking is lower given the fact that we have medium and small size banks. Therefore, we are less prone to the risk or the risk of inter-connectedness. I personally believe that consolidation is a little bit of a myth and it will take time. There may be an opportunistic play.
Q: Strictly opportunistic because why would you want to invent the wheel and the guys who are getting the licence could be big conglomerates and could get in Rs 15,000 crore a year?
A: Banking is a primary business, it cannot be an additional business. So what I mean by that is that one has to be into this business on a day to day, hour to hour basis literally because the risks are only compounding, they are only heightening. Yes, private houses have the pockets, they will need management teams and it is not unlikely that some of the private banks maybe attractive opportunities because they have basic governance in place, they have too many engagements in place. Therefore, some of the older private sector banks could be attractive targets.
Q: If four-five new banks are given the license as has been expected or some sources indicate, what will be the impact on incumbents like you all, more so in the near term? Would you see a lot of pressure in terms of employee retention which could hurt you all? And generally in the near to medium term, what is the impact that you see on the industry?
A: The opportunity as I mentioned is to diversify the financial landscape and really tap what is financially excluded or underpenetrated. Even the bank population in the country is approximately 40-45 percent. It is also very underpenetrated especially when you compare it to other Asian countries.
If you look at Yes Bank which is the last private sector bank to be licensed and commissioned in 2004, in just nine years we have become the fourth largest private sector bank with a balance sheet of Rs 90,000 crore with about 7000 people right now, 700 plus ATMs and 400 plus branches. The fact of the matter is that despite a fairly proven track record through good and difficult times, we do not even have 1 percent market share.
It has taken us nine years of two shifts a day to get to just about 1 percent. So it is a very high road for any new private sector bank, whether it is a conversion or whether it is a green field license. And in the business of banking you cannot be in Formula One. There are too many twists and turns.
Q: At any point in time you have only that many trained bankers, so would your margins be under pressure because your wage will has increased?
A: Once you build a good risk culture, you build a good institutional HR DNA that people identify with. There are good HR policies and owner, manager, partner kind of sentiments that collect together. It is very difficult to dislodge that. Every executive today has the ability to get into an entrepreneurial situation all over again.
There will definitely be some erosion and most banks will face that pressure. We also hired from competitive banks when we set up but, the fact of the matter is that we didn’t have any impact on what we considered to be competitive banks. They have done equally well. So I don’t think there is any adverse impact.
The market is large enough and broad and deep enough to absorb more players and it will be a good step as and when it crystalises.
Q: It is just that this time it could be qualitatively different?
A: Qualitatively it has a lot to do with business models.
Q: How would the return ratios of these new banks be if someone starts by going into only unbanked areas, may be tier III – IV going all the way down to tier VI? What would the return ratios in your estimate be just as a reference?
A: If a new bank comes in with comparative advantage of non-legacy it may depend on it. Two, technology costs have come down very rapidly ever since we started nine-ten years ago. So a lot will depend on how innovative the product offerings are, how creative technology applications are and the cost of transactions are.
One of the areas where Indian banking has tremendous scope to improve and I hope the new banks create a paradigm in that respect is to really reduce cost structures. And that is a very important factor for ensuring that productivity and efficiency ratios of these banks are as good as some of the other private sector banks.
Q: Your results have been analysed and everyone has put a buy on your stock. But let me look at the next 4-5 quarters, in the last quarter of FY13 and the quarters of FY14 net interest income (NII) growth was 37 percent, profit growth was 35 percent, net interest margins (NIM) grew 10 basis points, gross and net non performing loans (NPL) came down by about 25 percent, will this be the picture for the next four quarters or do you think that the inevitability of the slowdown, the pressures of fiscal contraction will cast some pressure on this pace of growth and the quality of the asset?
A: We are being cautious not only because of the more recent past but, for the last two years because the risk signals, the red flags have been in the system pretty much from the middle of the fiscal 2011-12. It has only got heightened in 2012-13.
I must say that the developments of the last six months or so are somewhat promising and encouraging. That does not mean that the system has been derisk because there is a fair amount of de-bottlenecking to be done on project implementation, certainly in terms of trouble shooting, some of the infrastructure sectors creating more enabling provisions for such sectors. But, fact of the matter is that the credit environment was also analysed by Reserve Bank of India in its strength and progress annual report very recently. That credit interest rate risk as well as liquidity risk in India is fairly resilient.
If one looks at the overall net NPA position of Indian banking, it is around 1.4 percent for the entire banking system put together.
Q: That is because you are not counting restructured assets. This is understated also because you don’t count State Electricity Board (SEB) restructuring even in the restructured assets. We are not counting a large part of what Air India did. I don't think a large mass of investors or even professionals quite believe that number at the moment or the fact that the Indian markets or Indian banking sector is stress free, it is a high level of stress. Yours has ring fenced itself, so, do you think this is possible because this is a tidal wave that is enveloping the economy?
A: I don't think that is rough and tough, it is not that. If one has a good risk architecture, if the systems are proactive, if the origination, the approval process, the provisioning process and most of all, the collection process which is the risk architecture in totality is proactive and responsive, at least I like to believe that every bank depending on their own risk culture can defend itself under the current duress in the market as you point out.
Q: You expect your prorate would be as good as this?
A: We would like to certainly believe that we will maintain gross NPAs around 25 bps and certainly net NPAs below 10 basis points. This has been demonstrated consistently for the last four and half years. We have been through the US crisis, European crisis, somewhat of the Indian crisis also and we are not technically out of some of the crisis.
Q: Stress accumulates, you are able to take it in the first year, second year but then as the stress accumulates, what will you do and I am asking you because I went through your division of assets to various sectors.
A: If you look at it, there is hardly concentration.
Q: Normally what does an investor think? High yield is high risk, high return is high risk, hence the question.
A: There are two parts here. First part is risk is not necessarily accumulative or accretive. Risk needs to be solved as and when it is spotted. So I believe that risk management deserves immediate attention and the pre-emptive derisking and de-stressing. So we are not carrying forward risk in our books because there is no way that the banking system will appreciate that or investors will not be able to recognize that.
On the yield question, we have to recognize that Yes Bank has a 90 percent plus floating rate book. So our yields are also repricing because if you see 2009-10 or 2010-11, our yields were lower than some of the larger private sector banks. As we moved up significantly on the interest rate curve, our loans have also repriced to higher levels.
Second point is that we are predominantly a rupee bank. We don’t have international loans on our books. And international loan yields are lower.
Third point, I hope we prove it in the future, as we have in the last four and half years, the risk culture and architecture of the bank has been tested through fairly severe shocks at a fairly young age in its life cycle. We are less than 10 years old but, we have been through some very deep shocks.
So I believe that the spirit of the bank, the risk culture of the bank should be able to tackle any residual challenges that are there.
Q: Given the weakness that we have seen in general in the market environment, do you see a reason for perhaps being a little cautious in terms of lending? The Net Interest Income (NII) has been growing at 35 percent growth run rate for so many quarters now. Is there a reason that perhaps it will slowdown or you all will choose to slow it down?
A: As we have been in the last two years, we will continue to be cautious well into 2013-14. There maybe green shoots but still we have to be cautious.
The Net Interest Margins (NIM) and NII in our bank to a large extent are accreting now because we are ratcheting Current Account Savings Account (CASA) by 1-1.25 percent sequentially every year, ever since the deregulation of savings rates happened about a year and a quarter ago.
So it is actually the CASA which is truly contributing to our pan India branch network. We are truly a retail bank today with over 400 plus branches. We expect to be about 900 branches by 2015.
It is really the conversion of our corporate customer employee accounts, new customers to the banks who are contributing to the CASA and secondly, there is a retail expansion. We have really revamped our retail asset team or retail liabilities team. There are new sources of revenue which are somewhat less riskier and more diversified.
So both from a revenue, risk and liability formation standpoint the bank is going through a very good phase in its life cycle of transforming and diversifying its risk basket.
Q: What would make the Associated Chambers of Commerce and Industry of India (ASSOCHAM) and you give a 9/10 to the Finance Minister's Budget?
A: I personally believe that ASSOCHAM and Yes Bank have some common denominators here. I believe that the scope for expenditure reduction and switching that expenditure to capital formation, new investment formation is one turning point we definitely want to see in this Budget.
Conversion of physical savings into financial savings, which also is absolutely a stepping stone to the next wave of new growth is another very major signal that we are expecting. The Finance Minister has had two dream budgets in the past, in 1997 and 2003. If he can once again demonstrate that fiscal consolidation and this year if he has hardwired 5.3 percent as the deficit and if he can get to 4.8 percent it is a very good signal for the markets. Moreover, his plan to get around 3 percent or so in the 2018 plan gets hardwired, it is a very good signal for the markets.
The Current Account Deficit (CAD) which is at an unacceptable level will resolve through Foreign Direct Investment (FDI) measures which are not necessarily part of the Budget. But, definitely gold imports through creation of a gold account is something that will happen in this Budget because it is an overdue step and I see the writing on the wall on that one.
So there are three-four things which can be very consequential apart from many good reform measures that have been announced pre-Budget, the implementation of which I believe will make a very big difference in the future.