Expect NIMs, gross NPLs to improve in Q3, Q4: Bank of India

N Seshadri, ED, Bank of India is hopeful of improving net interest margins (NIM) in the third and fourth quarter of FY13. According to him, deposit cost moderation and credit pick-up is going to contribute towards better NIMs.

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Seshadri also expects recoveries to outpace slippages in the next few quarters. Besides, he believes the slippages in the quarter ending December will be lower than the previous quarter. Going ahead, the ED of Bank of India sees gross NPLs coming down in the next two quarters.

Here is the edited transcript of the interview on CNBC-TV18.

Q: Not just Bank of India, but much more than your bank, other banks, even your bigger rivals have had a huge problem with restructured assets and gross NPLs. Can you take us through how your NPL picture might look in the current quarter? You should have a fairly decent idea and your guesses as to the next quarter?

A: Yes, we did fairly larger slippages in the first two quarters largely because of the way the economy behaved and we were ahead of the curve in terms of NPLs. We have seen a moderation and we have seen some of these NPLs which were not on viability but, on the cash flow constraints that they had. They are in fact responding and we hope that the upgradation and recoveries would outpace the slippages.

I am not saying the slippages have completely stopped, it is a function of the economy. There would be some slippages but, we could see that in the fact that the recoveries and upgradation outpaces the slippage and as far as this and next quarter is concerned, we will definitely see that process continuing.

Q: Slippages in the second quarter were at Rs 2733 crore, you expect it to be lower than that?

A: It is much lower than that.

Q: One of the brokerages had come out with a mid-quarter review of Bank of India and there is an expectation that net interest margins (NIM) might actually improve from that level that you had hit in the first half of FY13 which is at around 2.3 percent. Can you just give us a guidance in terms of how exactly NIMs would pan out in this quarter and for the second half?

A: We have declared results pretty well in the last quarter also. Traditionally, you would see that NIMs would go up on a quarter on quarter basis because the first quarter and second quarter NIMs are subdued.

We would definitely see that the third and fourth quarter NIM should improve for two reasons, one is off-take and pick up and the second which is more important is the moderation in the deposit cost. The liability cost in fact, would have a lag effect and we would see that in the third and fourth quarter, there will be an appreciable contribution on account of a reduction in the cost.

We had actually given an estimation of NIM which would be close to about 2.60 to 2.65 percent as we go along. I think it is happening. The fourth quarter NIM would be closer to the annual average NIM of the bank.

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Q: A word about your restructured assets, have we got the number right, Rs 20,589 crore, 6.2 percent of the total book, is that the correct number?

A: No. I mentioned last time that these are also restructured, including the NPLs and also on a cumulative basis. Some of them have also moved out of restructuring. Now we are looking to some sort of uniform guidelines from RBI. But, what we understand is if we take into account only the standard restructured accounts which are continuing as restructured accounts, their number would be substantially lower than that.

We are reworking and we are expecting guidelines coming in anytime, so that there will be uniformity in terms of reporting by all the banks. But, this is actually gross cumulative restructured including the NPLs.

Q: So, logically you should deduct the gross NPLs from this number to get the correct net restructured picture, is it?

A: Absolutely. Gross NPLs and even those who have come out of restructured assets will go out, not on an accumulative basis but, in fact we have to rework it. The number would be substantially lower than that.

Q: Lately we heard of Hindustan Construction, Hotel Leela, Bharati Shipyard and Suzlon, do you have accounts in any of these and are they included in this Rs 20,000 crore restructured or will there be a fresh addition in the current quarter?

A: Our exposure is very minimal in most of these accounts. I don’t think it will change the numbers.

Q: What exactly is happening with developments on Kingfisher Airlines? We do understand that you had aviation exposure up to around Rs 4000 crore totally towards aviation but, there have been those lender meets which have happened with Kingfisher and those have been pretty much inconclusive at this point in time. There is a lot of talks with regards to Etihad as well. Give us some sense in terms of where talks stand with Kingfisher and what recovery plans do you have?

A: Your guess is as good as mine. But, we have some sort of restructuring plan which is underway. The lenders have commissioned an independent plan for restructuring and the moment we get it, we will have a close look at it and see how the equity infusion happens. Apparently, equity infusion cannot come without any conditions.

We do realize that the lenders also need to take a relook at their lending portfolio. We will work on that and we would definitely find a solution in maybe the next couple of weeks.

Q: Restructuring of loans of the State Electricity Boards or SEBs was announced with some fanfare. There was supposed to be a discussion between the consortium of banks, the SEB, the discom in question as well as the state government, has even one instance happened?

A: As far as our portfolio is concerned, it is relatively small and we have done restructuring to the extent of almost about 50 percent of it. I don't see any revisiting of some of them and regarding the other half, we have no concerns. We will have to wait and see where there are very troubled discoms and where the state government will have to take a call. We are waiting and watching but, we don't have much exposures on those cases.

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Q: Can you leave us with some amount of guidance because your gross NPAs reached levels of around 3.42 percent, your net NPAs were at around 2 percent. Do we see that subsiding going forward? What would be the trajectory in terms of gross NPA ratios for you all as well as what is the restructuring portfolio or pipeline looking like for you all?

A: We would definitely see the level of NPLs going down in the next two quarters. As a result, the gross in NPLs will have to go down and we have given a guidance while giving out our results for Q2 and we stand by the guidance given then. As far as restructuring is concerned, there is some restructuring but they have moderated in terms of new restructuring. There is still strain in the economy and it has resulted in some restructuring. Although, we are looking at it, it is not as large as we had seen in the earlier quarters.

Q: For a large number of the PSU banks, the small and medium enterprise (SME) sector was a nameless sector, not any big names but largely causalities of the economic slowdown. Is that turning around at all or are things really as tough for them as it was in the past three quarters?

A: We are seeing SMEs looking to some sort of a growth and if you see the working capital cycle and the demand on working capital cycle, it is an indication. Definitely, SMEs are now looking to the higher working capital. Possibly, inflation will also have an effect because when we have an inflation of 9 to 10 percent, the input cost goes up.

But, we have not seen a very good evidence in terms of capital expenditure despite the fact that some of them have started to look at the possibilities, maybe next year hoping that there will be an interest rate reduction. However, we don’t see much of a trouble as far as the portfolio is concerned because it is a very varied portfolio and wherever there is a hand hold refund, we have done that in a very proactive manner.

Q: On policy day you told us that considering there is very near commitment from the RBI that it will cut rates in January, you may want to advance it by a few basis points cut in the base rate. Any progress on that, has the Asset - Liability Committee (ALCO) met?

A: We are looking at the liabilities very closely. A large amount of this passing on will depend upon the liability side which definitely at this point of time is giving a positive indication. We are very positively inclined and soon we will take a decision.

Q: So is it across the board or certain buckets of liabilities?

A: We have done it in certain buckets and we will do it across the other segments as well. We are also looking at possibilities of doing it across the board. That is something which we should look at. But, given that we will get some sort of positive indication in the next five-six weeks, we will be open to having an across the board relook on the basic rate.