Banks must set deficiencies right to check frauds: BoI

Bank of India is also one of the bankers to Bhushan Steel. However Iyer said that they are not facing any operational challenges with respect to Bhushan.

Below is the transcript of VR Iyer's interview with Latha Venkatesh and Sumaira Abidi on CNBC-TV18.Latha: Is the finance ministry now looking more closely at cases reported by the banks or even not reported by the banks? We saw that Oriental Bank of Commerce (OBC) and Dena Bank case, is there a tightening of screws, are they asking you all for more reports?A: What has happened in Dena Bank and OBC is an instance of an isolation where perhaps both the banks have got defrauded in the entire episode. So of course the ministry has written letter in this regard to all the banks to take the required precaution especially on the know-your-client (KYC) aspect while accepting the receipts and also extending loan against that. So in this case of course they have written a letter to all the banks to exercise caution and to advise all the branches.

Latha: It is an individual case of defrauding by a lower level official but it is still Rs 480 crore in question. Only about 70 percent of the money has been recovered in OBC, we don’t yet know how much Dena Bank has recovered at all. Rs 400 crore is not a small amount even if it is a lower official. Therefore, are you in the process of tightening anything at all like are middlemen banned?A: Absolutely, it is a systemic risk. What happens at the ground level is when the deposits are offered, they get a little bit lured to increase the business size of the branch. So there comes the deficiencies in accepting the KYC, requesting the KYC, getting in touch with the original depositor. So these are the normal safeguards, which any branch has to take at and here is where the deficiencies occur. So it is not intentional but not adhering to the systems and procedures. I totally appreciate that the amount involved is not small, it is fairly big but then it does happen occasionally when you work with the big network of branches. The fraudsters are always smarter than the banking officials who are posted there. They always have their way of doing things and then we do fall prey to it sometimes. I am not arguing for the bankers side but then the precautions are, the systemic requirement deficiencies are to set right and they have to be strengthened, there is no doubt about it.

Sumaira: For your bank itself in Q1, we saw the gross slippages were led by steel and infrastructure companies, was the bulk of it Bhushan Steel - what is your exposure to Bhushan Steel and also Winsome Diamond?A: Q1 the gross NPAs did increase but then that had more of a technical non-performing assets (NPAs) and you will find upgradation of those NPAs at least to the extent of about 30-35 percent in the current quarter. Having said that, specifically regarding Bhushan Steel we are also the bankers to the Bhushan Steel and as of now we are not facing any operational deficiencies or regard to the record of recovery. We do have exposure in both the Bhushan Steel brothers.Latha: What is the latest step on Bhushan Steel? We heard that banks had further sanctioned Rs 6,900 crore that is going or will that be withheld?A: As of now those loans have been given after due diligence and proper assessment. Of course, the call has to be taken now, the consortium bankers have decided they would go ahead with appointing the lenders, engineers and also the auditors for it. We will wait for the report before we would go ahead with any further disbursement.Sumaira: For your bank, one of the concerns that many analysts have that in FY14, you saw your core loan growth rise about 25 percent, this kind of aggressive growth on your balance sheet -- would that not make you more vulnerable to such cases of bad loans?A: I think I did cover this in my earlier interview. I would like to appreciate one-two points - we are a bank where one-third of the business is from the overseas. So currency appreciation has contributed to almost 4 percent of increase in the business.Secondly, we were also one of the major bank contributing to the FCNR bank deposits over the Reserve Bank of India (RBI) window. So against that one-third leverage has taken place by way of advances. So that has also contributed to almost about Rs 15,000-18,000 crore of business from them alone because we mobbed up almost USD 1.8 billion of FCNR(B) deposits through that window.Thirdly, we had consciously increased our advances to the AAA rated public sector undertakings to the navratnas almost by about Rs 14,000 crore where the risk weight is only 20 percent. Likewise, even in non-banking financial companies (NBFCs), during the volatile market situation in July-August we increased our exposure to AAA NBFCs to the tune of Rs 9,000 crore. Apart from this, if you factor in all these things, our growth is not -- the pace of increase in the risk weight is much lower than the pace of increase in the advances.So I would like to point out that of course the market feels that we are aggressive in terms of percentage but if you look at the analysis part of it where we have grown, how we have grown, we have been careful and conscious enough to see that we don’t aggressively grow on the risky assets or where the risk weights are more or where the ratings are low. We do take that precaution.

Latha: Only with respect to Bank of India, the fear is that in 2007-2008 period, BoI saw some aggressive expansions and you had to contract your balance sheet for a couple of quarters around 2010 to live down those bad loans, the market fears that there shouldn’t be a repeat of that, can you assure the market to that extent?A: Absolutely. We are seized off those happenings in the past and we are extremely careful as to what we are adding to the credit portfolio. In fact, weekly reviews take place, the risk management puts in place every fortnight to me, what the type of advances, where the credit deployment is going to which sectors and what is the risk weights we are carrying to. So we are very conscious of this and I can assure the market that there will not be repetition of the happening that has happened in the past.Latha: Let me also concentrate a bit on capital. Your tier I capital was lower at 7.3 percent, when you reported numbers. After that you raised some perpetual bonds, didn’t you, what is tier I capital now stands at?A: BoI has raised 81 bonds for Rs 2,500 crore and with that the capital adequacy of tier I would increase by about 78 bps.Latha: So the total tier I would be?A: It may go up to 8 percent.