Managing Director & CEO''s Letter to the shareholders
On behalf of the Board of Directors and Employees of the Bank, it gives me great pleasure to invite you all to the 100th Annual General Meeting of your Bank.
It is a humbling experience to stand before you on this momentous occasion - the 100th AGM. At the outset, I would like to thank our various constituents - customers, shareholders, regulators, staff, and business-partners - for their help and support in making our journey a success. Without your continued trust and support, this journey would indeed have been parlous. We continue to remain grateful for the confidence that all of you repose on us.
Before I brief you of the developments that have taken place during the year in your Bank, I would like you to visualise the changing environment in which we are operating now.
The trite and hackneyed phrase, change is the only constant, has never been truer than in our times. The rapid evolution of technology is impacting life in general. Its effect on businesses that are more amenable to automation - e.g. banking and finance - have been even more startling. These changes can be classed into the following broad types: first, impacting how banking products and services are accessed by consumers; and, second, the nature of the products and services offered.
Technological changes with respect to first have changed the way customers are interacting with the bank. Initially, the customers shifted away from the Teller at the branch to an Automated Teller Machine. From there, they have moved to the web and thereafter to their phones. Every type of banking transaction can be carried out by the customer - save for accessing his / her locker - without setting foot in a branch.
The pace of migration from physical channels to digital channels is only increasing. Banks that do not adapt to these changes would face a Darwinian future. Your Bank has over the last year made considerable progress in adapting itself to the new paradigm. Your Bank''s KVB Dlite App allows customers to carry out their normal banking operations - checking balances, looking at payment status, account statements, stopping cheques, activating / deactivating cards, making payments etc. - seamlessly from their phones. It also enables them to pay bills and shop seamlessly! I am happy to inform you that KVB Dlite has been downloaded over a million times and has received very good ratings from users. KVB Dlite also allows non-customers'' to access our services in a simple and seamless manner, thereby increasing our customer count considerably.
The revolution on the lending side has been similarly notable. The market today is crowded by FinTechs, which have taken advantage of the digital infrastructure in the country to disintermediate Banks. These
entities rely on the India Stack and the rapidly developing infrastructure of Credit Bureaus and other information providers to process loan applications electronically and quickly. I am happy to inform you that your Bank is a leading player in this arena as well. Your Bank launched its Digital Transformation journey approximately 18 months ago. During this period, all our retail loans and smaller ticket commercial facilities (less than INR 2 crore) have been fully automated and digitalised. This has given us - for the first time -the capability to compete with the newer private sector banks and Fintech''s on an equal footing. Indeed in some cases, your Bank''s offerings are superior to those that are offered by any competitor. This has helped your Bank grow retail loans by 48% (24% excluding Interbank Participation Certificates).
May you live in interesting times, is said to be an ancient Chinese curse. Our times are anything but interesting. By definition, ''interesting'' implies volatility which in turn implies risk. Over the last year many events have driven volatility: first, external events led to a sharp devaluation of the Rupee followed by a subsequent recovery; second, factors connected with the ''first'', and perhaps others, led to sharp movements in money market instrument yields; third, events associated with a NBFC in the infrastructure space led to sharp contraction of credit, initially in the NBFC space and thereafter to the broader market; fourth, trade related events on account of protectionism.
This by no means a comprehensive list. What it does highlight is the need for your Bank to remain vigilant at all times and to have risk management systems that can address events of this nature.
To this end, I am happy to report that we have made very substantial progress. Not only has the staffing of our Risk Department been substantially enhanced, their access to tools / technologies to deal with risk have also been enhanced. Your Bank, till a year ago, underwrote most of its loans relying solely on the judgment of the underwriter. Whilst this is not a problem when the underwriter is skilled, consistency of the underwriting decisions taken at the Branch level remains an issue. To address the same, our digital solutions deliver the underwriting decisions through score-card based models. This enables us to continue providing superior service at the branch - i.e. decisions can be communicated immediately at the Branch while enhancing controls within the lending process. Over the year, all retail and small ticket commercial loans (below INR 2 crore) have transitioned to this model. I am happy to inform you that the portfolio performance on the newer cohorts is significantly better than the older ones.
Frank Knight of the University of Chicago - a leading thinker in the area of risk - makes a distinction between risk and uncertainty in his seminal work - Risk, Uncertainty and Profit. As Knight saw it, an ever-changing world brings new opportunities for businesses to make profits, but also means we have imperfect knowledge of future events. Therefore, according to Knight, risk applies to situations where we do not know the outcome of a given situation, but can accurately measure the odds. Uncertainty, on the other hand, applies to situations where we cannot know all the information we need in order to set accurate odds in the first place.
For all Banks risk and uncertainty need to be managed as a composite quantity. As an aside, I am as yet unaware of any bank that has an Uncertainty Department - only a Risk Department that perforce has to manage both. Rapid environmental changes - of the type that we have been going through -create significant uncertainty. That in turn adds to volatility in the portfolio as the impact of uncertainty flows through. Your Bank is taking steps to ensure that the impact of Risk and Uncertainty are managed effectively. An important hedge against risk is capital. On this count, I am happy to report that your Bank is one of the best capitalised entities operating in the country today with CRAR at 16%.
While your Bank rolled out the initiatives envisaged in the prior year and had many successes during the current year, it is perhaps appropriate to address the challenges first.
During the year we continued to face headwinds with respect to portfolio performance. These arose principally from the Corporate and Commercial books. Your Bank has invested a great deal of effort to improve its collections practices - a consequence of which has the sharp reduction in delinquent principal (i.e. the total principal of loans where loans remain unpaid for more than 30 days). Your Bank is working hard to ensure that the gains made in portfolio performance are maintained as we go into this year. I would like to reiterate that the newer vintages - i.e. new loans underwritten using the digital systems - are performing much better and this gives us confidence that the portfolio performance will improve with time.
Our successes during the year include the following:
a. Successfully enhancing capital without diluting existing holders by raising INR 487 crore of Tier II Debt. As stated earlier, CRAR stands at 16% with CET1 ratio 14.28%, well above the regulatory prescription.
b. Total business grew by 7%. While Advances grew by 10%, Liabilities grew by 5%. Savings Deposits grew 10%, Demand Deposits grew 4% and Time Deposits grew 4%. Measured on averages, Savings Deposits grew 12%, Demand Deposits 6% and Time Deposits 2%.
c. CASA performance was good with your Bank hitting the 30% mark (as a proportion of total deposits) for the first time.
d. The nature of our Advances Portfolio changed materially during the year. The Retail - our best performing portfolio - grew 48% to account for 22% of the total portfolio (up from 17%). Corporate shrank 2%, whilst Commercial and Agriculture grew at 6% and 3% respectively.
e. Your Bank implemented Risk Based Pricing. This enabled your Bank to ensure that the Net Interest Margins remained at levels close to industry best. While NIM on an annualised basis was lower than prior year (on account of large non-recurring interest income in the prior year), however, the last quarter of FY 2018-19 saw our NIMs expand to 3.88%.
f. Revenues grew 4% in aggregate (Net Interest Income (NII) grew 3% and Other Income grew 7%). NII growth was adversely impacted by reversals on account of flows into NPA. As the portfolio performance improves growth on this count will get restored. Other Income continues to very encouraging. It may be noted that your Bank is an outlier amongst peers with respect to the Other Income.
g. Expense grew by 14%. While other operating costs were under control (growing by 9%), staff expenses grew 19% on account of: first, larger than expected accruals for employee retirement benefits; and second, full year impact of expected IBA wage settlement.
h. Your Bank''s treasury portfolio has been substantially restructured during the year. This results in reduced risk / volatility.
i. Provision Coverage Ratio ((PCR) as defined by RBI) improved to 56.86%. PCR - defined as Provisions Held divided by Gross NPA - improved from 36.17% to 44.07%.
j. Upgraded the Core Banking Platform to give us multi-channel transactional capabilities together with Open API Banking.
k. Launched Commercial Credit Card
Your Bank is positioned well to take on the challenges / opportunities of tomorrow. Our investments over the last year in technology, manpower, knowledge and infrastructure will enable us target the right customers and serve them in the right manner. Changes to our risk acceptance and risk management functions will help us originate high quality risk and thereafter ensure its appropriate maintenance. Our traditional focus on customer service - delivered through our friendly staff - has helped build an enviable reputation with our customers.
The market is offering us enormous opportunities. Our competitors - many of the other banks and NBFCs - are unable to address customers as they battle Capital or Liquidity challenges. In this background, our new systems should undoubtedly give us an advantage that we are determined to convert into realised market share gains.
As we move into the current year, our focus shifts to the following:
First, to get throughput from our technology initiatives - both on the assets and liabilities side. While our new systems have been adopted well by our staff, greater familiarity will result in higher sales.
Second, scale Transaction Banking Platform - both on the loans as well as deposit side. This platform is currently undergoing upgradation. This will enable us to grow our share in Supply Chain Finance.
Third, we intend to launch and scale a digital gold loan offering during the year. Your Bank has been traditionally dominant in this space. However, newer players and newer technologies have reduced our efficacy in this area. We intend to ensure that is corrected over the year.
Fourth, scale our Commercial Cards business. Whilst the launch and test phases have been successful, we have thus far not added cards aggressively as we continue to test the systems / processes. Over the year we intend to scale this business and turn this into an engine of revenue growth.
Fifth, grow non-banking revenues. These grew by 38% last year. We intend to continue to grow in this space. We have proposed to establish a Wealth Management joint venture with M/s. Centrum Wealth Management Ltd., subject to approval by the RBI. This will enable us to enhance the services that we currently provide our customers. Our current offerings - transactional services together with savings and borrowing - will be expanded to include investment related services. This will increment the level of engagement with our key customers and open up other opportunities for the bank.
We remain confident of continuing to add value to our various constituents - customers, shareholders, employees and business partners.
I would like to take this opportunity to thank our shareholders for their support and patronage. In addition, I would like to place on record our thanks to the Reserve Bank of India and other regulatory authorities for the continuing support and guidance.
With warm greetings,
P. R. Seshadri,
MD & CEO