The reason why Bank of India looks to retail for expansion

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Amidst rising concerns over non-performing assets (NPAs), state-owned Bank of India (BoI) is planning to extend more credit to retail as well as small and medium enterprises (SMEs). This will eventually bring down its exposure to large corporates. The lender, according an industry source has loaned around Rs 1,500 crore to Air India and around Rs 400-500 crore to Kingfisher airlines. Both the debt-ridden companies are struggling to repay their loans and looking for restructuring schemes.

In his first media interview as Executive Director of Bank of India, M S Raghavan who joined the bank on January 01, 2012 spoke with Moneycontrol.com's Saikat Das on a range of issues from credit growth to interest rate outlook and liquidity situation. In the last one year BoI shares underperformed the benchmark BSE-Bankex by a wide margin, falling 11% against a 4% rise in the index.

 According to analysts tracking the bank, asset quality concerns still weigh on the stock. The bank (net) restructured assets of Rs 18,424 crore during the October-December quarter. Restructuring means that the bank revises the original terms of the loan, and could be willing to either accept deferred interest payments, or a lower rate of interest, so that the loan doesn't go bad. Most analysts have a 'neutral' or 'sell' rating on the stock. The bank will have to improve its asset quality significantly for analysts to re-rate the stock.

Below are the edited excerpts of the interview: 

Q. What is your outlook on interest rates? 

 A. In the last monetary policy, the Reserve Bank of India has consciously chosen not to reduce the policy rate. It is because of the fact that the rate of inflation has not come down in manufacture sector, the way the RBI expected it.  But, it has come down in farm sector.

Through the policy, the regulator has signaled to the market that interest rates have peaked. In our opinion, it may not decrease the policy rate in another two policies. So, I do not foresee any great slashing of interest rates in this quarter (Q4).

However, interest rates will have to come down after March quarter as a result of policy transmission.

Q. How do you plan to grow your loan book?  

A. The consecutive rate hikes coupled with slackening economic condition marred the investment climate. Further investment is not taking place in India. No great project was coming up in the last 6-12 months. Ultimately, it has led to subdued credit growth.

In this fiscal, we would end up with a 15% year-on-year credit off-take. I expect, the growth will come from SMEs, mid coporates and retail as well. It will not come from large corporates.

Nevertheless, there was no conscious decision to decrease the large corporate exposure. We just want to increase our focus on others. Consequently, this will reduce the share of large corporates in our loan book.

Q. How does BoI stand to gain from retail expansion?

A. Retail is spread across the nation. Hence, the risk is also nicely spread. It is a proof against the cyclicality that we have observed in corporates.

In retail you will find handsome returns. Apart from this when you go for retail credit, you get spill over benefits. People will open current account and savings account with you. Your customer base will increase. The possibility of cross selling or third party product sales will go up. Consequently, the profit maximization takes place. It will also result in marginal increase in net interest margin (NIM). 

Q. Do you have any sector bias for large corporate lending?

 A. We do not have any sector bias. Actually we follow two mantras for corporate lending. One is of course the cyclicality in sectors like textile, fertilizer, cement and so on. We are pro-cyclic. The second factor is the "present day priority". Today the present day priority is the infrastructure sector. We have to build roads, power stations and so many other things for capacity expansions. Our lending is tuned to those two factors.

Q. Is asset quality a concern? 

A. We will do everything to avoid NPAs. We are strictly adhered to our loan sanctioning parameters. We are now fully converted into system generated NPA recognition process. With this, every account is being monitored very closely. 

We are not sanctioning any unseasoned or fresh loans. (Unseasoned loans are any fresh credit that is less than one year old.) We have shed around 7,000-8,000 crore of Letter of Credit (a form of credit disbursal) discounting. We are not renewing loans to State Electricity Boards. Consequently SEB exposure is reduced by 3000-4000 crore (during FY12). Roll over of those loans are not happening.

Q. How do you see the liquidity situation?

A. We are very comfortable on liquidity. We are having excess statutory liquidity ratio (SLR) bonds to the tune of around 3-4%. We are not borrowing from the market at all. Going forward we do not see any liquidity strain in the next three-four months. The reduction of CRR by RBI will also release additional Rs 1,300-1,400 crore liquidity support for BoI. This makes the situation further comfortable.

The system is illiquid. Actually, it depends from case to case. For example, on March 15, there is huge remittance of money on account of advance tax. Liquidity will be sucked totally due to this. To come out of this situation, it takes one/two months. 

Q. What is the way forward to grow the bank's business? 

A. We had appointed a consultant (Mckinsey) to revive our growth plans a year back. We have already implementing its recommendations. We will now grow our profits vertically. We are focusing on diversified growth.

For example, if we are to achieve Rs 50 crore advances within a specified period, we will do it in all segments including retail, agri, and corporates. Earlier, we were expanding without facts and figures.

Q. What is the status on the proposed capital infusion plan by the government of India? 

A. We approached the government of India seeking a capital support of Rs 1,050 crore for next one year. The government has responded positively to the proposal. It is expected to infuse the capital within this quarter. However, the form of infusion is not yet finalized.

saikat.das@network18online.com