Economy improving; see 19% credit growth in FY13: BoB

Bank of Baroda was declared the best bank in the public sector space in the Indian Banking and Financial sector awards by CNBC-TV18. MD Mallya, CMD, Bank of Baroda said the bank is not totally insulated from asset quality deterioration. He added that the economy is witnessing signs of improvement and the contraction of margins will not be substantial.

Ahead of its second quarter result, Bank of Baroda's margins are expected to stay at levels seen in the first quarter, said Mallya. He also sees credit growth of 19% in FY13. Besides, Mallya feels restructured assets could be higher in the current fiscal year.

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

Q: Starting with the problems of asset quality, even for a good bank like yours, we could see that in the last quarter the net and gross NPAs rising, how long will this problem last? Do you see it remaining bad for the next two quarters as well?

A: As far as the trend is concerned, because of the overall economic slowdown there have been pains for overall asset quality. Therefore, we are not totally insulated from asset quality problems. Definitely, I would say our performance has been far better in terms of protecting the asset quality, in terms of managing the delinquencies at reasonably low levels. It is all because the asset quality has been quite strong and therefore, that is the guidance we have given in the past.

Q: In the first quarter your gross NPLs went up nearly 28 bps and net went up over 11 bps. Will this be prorate increase?

A: I will not be able to comment as far as the current quarter is concerned. I am only talking about trends for the industry and for the bank as a whole. I would only say that when one sees an economic slowdown, it is but natural that the asset quality will be a little stressed.

We have experienced it in the system in the recent past and maybe it would take another 9-12 months before we are able to rollback in terms of substantial improvement in the asset quality or maybe arresting the delinquencies substantially. But, I am sure that this is going to happen because we have seen signs of positive sentiments in the recent past and therefore, growth of the economy should accelerate from now on.

Q: By 9-10 months do you mean we could see pains for 2-3 quarters going forward?

A: Yes, it could possibly be for 2-3 quarters. One cannot say, it could be bank specific also but, overall the pains will continue for some time.

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Q: Some private banks this time around have shown higher margins, will that be an industry trend going forward, will margins actually improve because of lower deposit costs or is that unlikely according to you?

A: Margins have been under pressure but, having seen what has happened in Q1, I think margins will be reasonable on those levels. Even if there is a contraction of margin, it may not be substantial. I think what has to happen in terms of reduction in margins could have already happened in Q1. From now onwards, the margins could be rather stable or even if negatively impacted maybe to the extent of around 5- 6 basis points.

Q: What about credit growth? How did it shape up in Q2 and how do you see it for the full year?

A: Q2 credit numbers are already available.It has been around 15-16%. It has been slightly less than what even RBI had estimated at the beginning of the fiscal. Therefore, one has seen a deceleration of credit demand. Going by the fact that sentiment seems to be positive at this point in time and festive season has just begun, there could be a slight improvement in credit growth.

Does it translate into a YoY growth of around 18-19%? Difficult to say now, one would rather put it at around 17% optimistically or maybe around 16-17% as a range perhaps. Given this scenario, Bank of Baroda have been able to show a slightly better credit growth in the past compared to the average industry growth, around 2-3%. Therefore, the industry was to go at about 16% and 17% and credit growth in Bank of Baroda could be around 19-20% for the full fiscal.

Q: My point of concern would be the asset quality again. In terms of restructured assets, they rose quite significantly in the past quarter; will they also rise for the next 2-3 quarters according to you?

A: This restructuring comes on account of two factors, one is because of the delay in the COD. That could be consequent to delay in getting approvals, consequent to any other external factor affecting the unit. That is one part of it.

The other part is where the company has not been able to do well, there is a demand slowdown. Therefore, there could be production bottlenecks which create difficulties for the unit temporarily. Both these units come in for restructuring.

As far as the first part is concerned, one can always expect with environment clearances and other clearances being obtained, the unit could be able to declare the COD and therefore, restructuring is only a phenomenon, a transitory phenomenon.

The second segments of units where there could be production bottleneck; demand recession etc one needs to understand more clearly what is the continued basic viability of the unit, the expected streams of income and the capacity of the unit to service the debt. If you are satisfied on that we would go with the restructuring.

It could be a combination of both these types of units coming under restructuring. Since we are passing through this sort of macro economic environment, the restructured assets for at least the next couple of quarters would be slightly higher than it was a year back or a year and half. Then it would taper down.

Q: There is no denying that Bank of Baroda has been best of class whether it is gross NPLs, net NPLs, provision coverage, restructured assets, cost of credit and yet you will notice you get a slightly lower discounting because in the recent past in certain cases banks show bad numbers when a chairman retires, what can you tell your investors since your retirement is also due?

A: I can only say that Bank of Baroda has been always transparent in terms of disclosure requirements and the accounting principles that we have followed. We have been consistent in our approach, we have been consistent in our performance and therefore, it is to my mind chairman neutral.

This is a culture of the organization which has been built over a period of time, not in one year or two years. It is not what I have inculcated into the system in Bank of Baroda after I have come here. It’s the culture and ethos of the organization and therefore, the type of performance which one has seen from Bank of Baroda in the recent past could continue to be stronger in the days to come because we have developed and infrastructure within the bank primarily focusing on HR has improved. I think it would go a long way in ensuring that the performance could only be better and certainly not worse than what we have been able to achieve.