Gross NPAs will come down Q4 onward: Bank of Baroda

Gross non-performing assets (GNPA) of Bank of Baroda will likely continue to increase till the third quarter and then start coming off from the fourth quarter onward says MD & CEO PS Jayakumar even as he draws attention to the significant improvement in operating earnings.

Bank of Baroda reported higher-than-expected slippages in the first quarter at roughly Rs 5,500 crore compared to Rs 5,900 crore in the previous quarter. Jayakumar says Rs 1,200 crore of the total slippages is on account of one-time activity on accounting for small loans not treated as NPAs earlier and the balance Rs 3,800 crore is equally distributed across other loans. Slippages in the corporate sector is around Rs 1,350 crore, he says.

He expects there is no reason to change the expectation of GNPA stabilising in the range of Rs 45,000-50,000 crore for the year. Provisions will be maintained around 60 percent, he says, adding due to aging of NPAs there could be increase in provisions and subsequently coverage ratio by the year end.Below is the transcript of PS Jayakumar’s interview to Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: The slippage numbers were unpredictable. One would have liked to see something around Rs 4,000 crore or less. It has come almost at last quarter’s level at Rs 5,500 crore. Last time, it was Rs 5,900 crore. You have reported about Rs 5,500 crore this time. Does it get better?A: I will give you the full picture. First, let us step back a little bit and look what has happened this quarter because while the focus is on recovery and slippage, there is the other part which is the focus on growth and renewal. What we have seen this quarter is a substantial jump in our operating earnings. In fact, this is the highest we have had in the last five quarters. It is nearly 22 percent over prior period same time and if I leave aside one quarter, it is probably the highest we have had in eight years. So, the point I am trying to make is that we are rebalancing our assets and rebalancing our liabilities, keeping the expenses in control as a consequence of which our operating income has come up. And really for us, the first level of measure is the operating profit because that is what gives us the ability to pay for bad debt or pay for expenses or any odd dividend in profits, etc.So, across all parameters, which is increasing savings accounts, reducing expenses also, so funding, shuffling the portfolio to assets which have a better earnings, making the risk balance revert, a lot of work has been done. Simultaneously, we have unleashed a transformation process which looks at every process, the scorecards, the kind of segments of customers, training of people, the digitisation of processes, relationship management, metrics, etc. the effect of which will start being felt from Q4 of this year. So, what I am trying to say is directionally, we have done the right thing and we are making good progress with respect to restoration of the revenue generation capability of the company by doing the right kinds of things. Now, in that context, the question is, does this slippage jar the whole thing. I would like to give you a little bit of a texture on the slippage, but prior to that, let me go back to the interview we had with you in the last quarter. What we said at that point of time is that we are seeing a likely non-performing asset (NPA) number stabilising between Rs 45,000 crore and Rs 50,000 with a bias towards the lower side. And also that we are likely to see initially a kind of picking up and then a reversal in third and fourth quarter. I also told you at that point of time, people generally have discomfort in believing to a hockey stick projection, but that is because a variety of steps that are being taken have that time to play themselves out. In this Rs 5,000 crore odd of slippages, we have Rs 1,200 crore that has happened as a onetime activity because of certain other accounting and various other things we have been doing which essentially is looking at portfolio at a micro level, small customers to see if any one of them should actually have been treated as an NPA and for some reason, they have not been classified as so. When it then come back to the balance which is Rs 3,800 crore, it is by and large, equally distributed between the corporate, the micro small and medium enterprises (MSME), the retail, agriculture. Then when I look at the corporate segment, the slippages are around Rs 1,350 crore, which by and large are matched with the recoveries we have made. So we are fairly stable with respect to the corporate portfolio.Now, our focus is on the smaller accounts, the retail portfolio and some bounces we are seeing in agriculture on account of the better monsoon. We did not have a strong retail recovery mechanism in the first place which we have been talking about. Now we have set call-centres, we have set all the processes around running a good retail collection, running a good MSME collection, so those processes are on. So, as I step back and ask you for a projection, I would say to you the same thing, which is at this point of time we have no reason to change what we said before which is this is going to be between Rs 45,000 and Rs 50,000 crore and with somewhere thereof.Now, as far as the provisions are concerned, we have said that we will keep to a 60 percent ratio and we continue to maintain that and as we got through the year and as we start looking at the NPA, there are some additional provisions that will be taken on account of ageing factor. So I am hoping, we are expecting at that end of the financial year, we would also see an increase in the provision coverage ratio whether it is 3-4 percent, that will play itself out, we see that as well. So, in summary, what I want to tell you is that right set of steps being taken, initial responses as a matter of fact quite high, in the way it has bounced back. Yes, there are some issues. We think the corporate side is well known. Issues are known to us and the market. The retail part of it, the agricultural part of it, more the agricultural part of it and the MSME part of it, is the area we need to put focus on. And we are doing that.Latha: I just wanted to know about your growth, because yes, your margins have definitely improved at an EBITDA level. There is growth, even more than expected, but can this pace continue and at what pace?A: Let me try to give you the details in the following manner. We have a total reduction in the balance sheet from some Rs 10 lakh crore in the last time, same year to a reduced number of Rs 9,25,000 crore or thereabouts. The reduction has happened both on the asset side and on the liabilities side. In liabilities side, we have paid something like Rs 30,000 crore of high expensive time deposits. And today, we are not a net borrower in the banking system. So we are, liquidity wise, adequately provided including potential run-off and including the planned run-off with respect to Foreign Currency Non-Resident (FCNR)(B). So, that is a sensible thing to do. As far as assets are concerned, on average basis, the decline is around Rs 13,000-14,000 crore which is effectively created because there are a large number of assets on which the risk reward tradeoffs to us are not favourable. And so, we are running them down. And this was also anticipated.For example, we have repaid something like Rs 9,680 crore of buyer’s credit. We have replaced it with some Rs 1,300 crore of local credit that is given to various companies, various people working in the middle east and elsewhere, where the margin on them is 300 basis points versus what we are losing here which is 30 basis points.So, there is a dramatic difference in the revenue earning capacity. What it also does for us is it preserves the capital for customer asset growth. So, this is what I am trying to say that today, we have Rs 1,65,000 crore of assets between our placement line and various kind of buyer’s credit which frankly, we can pay it off in a jiffy. That gives us an ability to grow Rs 50,000 crore of customer asset without deteriorating the capital adequacy ratio.Sonia: You did give us the NPA range of Rs 45,000-50,000 crore. But for the next couple of quarters, what are you targeting in terms of both recoveries and upgradations?A: In an ideal world, we would like to be there, but that is not going to happen. In terms of numbers, as I explained to you, we see the numbers going up till third quarter and then reversing back to the Rs 45,000-50,000 crore level. So, you can add these numbers. Maybe it is Rs 2,500 crore in the next quarter, in terms of net increase in NPA and then start slipping down after that quarter and the following quarter. As of now, we do not see any reason to change the guidance in respect of the range being between Rs 45,000 crore to Rs 50,000 crore.Latha: What do you think you will end the year with in terms of loan growth and in terms of margins?A: Let me do it this way. Next time when we come to you, we will do a representation and probably we will try to do the analysts as well. We have to differentiate between core balance sheet growth and tactical balance sheet growth. Now, for us it is very easy to take buyer’s credit to the same level, that is completely a non-issue. But we did take the interest rate up to see whether the rest of the people responded to the interest rate because the pricing is completely, it does not make any sense, at least to us. And so you have to take those decisions and hope the market itself rebalances itself up and follows us up. So, we then end up putting these buyer’s credit at better terms. Somebody has to take the first step, we have taken the first step.