Rana Kapoor: How Yes Bank emerged from NPA crisis unscathed

"This is not a commoditized business," Kapoor told CNBC-TV18, even as a look at the sheer magnitude of banks in India, with their rinse-and-repeat business strategy, would suggest otherwise.

"The bank has worked hard to develop a risk culture where accounts are looked at from a relationship, risk and products standpoint. Depending on the sector, banks need to specialise [in the areas they are lending]," he said.

Kapoor added that the bank's latest focus on retail banking -- it aims for its retail deposits base to grow to 45 percent in two years and 50 percent by 2020 from the current 35 percent -- will likely not impact its high margins.

"Retail be a high margin business if you focus on cross-sell strategies," he said.

Below is the transcript of Rana Kapoor's interview with CNBC-TV18's Latha Venkatesh.Q: You have said that all that Reserve Bank of India (RBI) said in its asset quality review (AQR) is already recognised by the bank. What is the future picture of bad loans, do you think you stop at 0.76 or do you think FY17 and FY18 because of the nature of the economy can still throw up 10 basis points more?A: The nature of the economy is going through a fundamental improvement. I think the regulatory environment which is enforcing some of these decisions including AQR - an early stage recognition, is also making its own contribution to problem solving and troubleshooting.When I look at Yes Bank, I am very pleased to report to you that even at 0.76 percent gross non-performing assets (GNPAs) and net non-performing assets (NPAs) of only 0.29 percent on a bank which has still 65 percent corporate balance sheet is a better outcome than most retail banks.Q: What is your secret? If you are 65 percent exposed to a corporate sector which for everybody else is throwing up probably 15 percent of bad loans, how is it that your 65 percent is producing less than 1 percent of bad loans?A: The solution lies in building a risk culture, building a risk architecture and building 3 eyed principle which at least in our bank is defined as relationship managers, product managers and risk managers who all look at a relationship from all angles. That makes sure that when you have a problem the red flag surfaces early enough. Second principle is that risk is related to structure. This is not a commoditised business. This business is about specialisation. So, depending on the segment, depending on the industry sector banks need to specialise.I am very pleased to share with you that after 12 years Yes Bank has proven over the last 32 quarters, since the global crisis started, that we are committed to building the risk architecture through specialisation. Everybody is affected by the heightened risk environment but more importantly is how do you salvage that, how do you proactively de-risk. Not everybody is a wilful defaulter. There are some very genuine problems and you have to help them through preservation of economic value, preservation of assets. 90-95 percent are good businesses.Q: The retail facing part of your book you said it is 35 percent and you are progressively going to take it to in FY17-18?A: Our objective is in two years from now we should take it up to at least 45 percent. By 2020 it should be a good 50:50 balance. We see opportunities for bank like ours with the brand resonating, with the kind of momentum, with the investments we have made in branch infrastructure, in terms of people. Almost 80 percent of our 15000 people are actually deployed today in retail and branch banking.So, by 2020 we should be equalised between the two mainstream businesses.Q: If you progress from say 35 percent to 40 percent by FY17 or FY18, won't that tell on margins because retail after all gives lesser margins?A: If you have a good wallet strategy, if you have a good cross sell strategy and if you are cross mining a client into selling multiple products it becomes a very profitable business.If you have monocline businesses selling singular products it can be a value destroyer.Q: You think this 3.4 percent can be maintained even if you become substantially retail?A: 3.4 percent has to get much better in terms of net interest margins (NIMs) because that is where we are right now.Q: You are at 3.4 percent NIM, if you get retail, is that margin likely to come down?A: It is going to improve because the overall cross sell really helps. The credit outlay on retail is far less because of the overall capital consumption being less.Thirdly what it does is, it creates also a liabilities multiplier. So, the CASA cost also comes down. You have to look at the totality of the retail and the SME proposition because when you look at the entire pie, it is a very profitable pie. What it needs is scale, what it needs is momentum, what it needs is brand because this has become like an FMCG business.So, with this brand resonating rather well is in a position to grow this with the right product mix and making sure that we don\\'t bring in value destroyers in the business.Q: What will your percentage of low cost deposits be in FY17? At the moment your retail deposits are growing very well.A: Our CASA has grown 5 percent in one year from 23.1 percent to 28.1 percent which is our single biggest leap forward in one year.Number two, the momentum of retail CASA plus fixed deposits is now almost 54.5 percent which is 6.6 percent improvement year on year. So, we are on track to get to about 40 percent CASA in approximately two and a half years far ahead of our original programme. We had targeted it by 2020, I am hoping that sometime between 2018-2019 we get to 40 percent CASA and that is a sweet spot as far as the liability cost composition is concerned._PAGEBREAK_Q: Can you tell us something more about how much is in the SMA 1 and in the SMA 2 category to reassure investors as to the future course of difficult assets?A: When you look at the sequence of credit quality - you look at NPAs, you look at security receipts, you look at the restructured portfolio and SMA 2 which is like a watchlist category, in our case is just about 1.5 percent of the total loan book.The fact of the matter is that SMA 2 is a watchlist, it is not like these people are falling over the cliff. In an economic situation like ours and with very dynamic regulations some of these customers need to adjust to best practises.So, I think the best practises that have been introduced by RBI supported by other stake holders is a reflection of building credit discipline, financial discipline and to me this is a very important principle. So, I would not be bothered about SMA 2, I would be more bothered about what is happening to security receipts, who is dumping where and restructured loan portfolios and are we able to collect NPAs because that is really where the ability of a banks credit competence lies, its relationship and its tactics lies. Fortunately in our bank we are doing reasonably well.Q: Your restructured advances in any case is not very big.A: And it’s come down marginally from 0.67 percent to 0.53 percent.Q: We know the big 10 indebted groups. What’s Yes Bank exposure to those groups?A: The big 10 groups are very important groups strategically in our country and if they are going through duress some of them, not all of them and they are able to monetise assets, we have to understand that risks is related to structure, so most of these groups are parking their best assets to salvage future value, monetise future value, these preservation of asset quality and I think there is an unnecessary sarcassism in the system to worry about these large conglomerates because the intent is very good. There are business cycles that they are facing which are of a really some setbacks, but the fact is there is also a revival around the corner.Q: I completely take your point it’s not as if they are non-performing loan (NPLs), but it is just that they are indebted groups, so I just want to know clinically, I am not passing a value judgment on the number. Clinically, how much would that be?A: Overall, as you know, our corporate exposure is 65 percent. The large group concentration is not so much and within that every group in our country because they are conglomerates, right, so they have good quality assets and may be 1-3 which are difficult. So, depends on where you are parked and how you are structuring.Q: You have told me that you are not expecting your NPLs to go up.A: The problem in the Indian Banking system is usually in the middle and the small businesses. The larger businesses have a lot of asset values and they preserve these assets.Q: So how much would it be 5-6?A: In our case it’s certainly less than 5 percent.Q: The other important question that I wanted to ask you is tie-ups. There are small bank finances that is the easy route to retail, will we see you buying up any of the smaller Non-bank financial companies (NBFCs), Micro Finance Institutions ( MFIs) anything inorganic?A: I think, it’s a very good question. In our case, we have aspiration to build through quality filters, through process management and systems management, our own outreach because we have got enough frugal systems to be able to outreach and we got also frugal technologies to back that. So the primary thrust in the bank is to build in-house organic strategies.Second point is yes there will be opportunities for alliances. Alliances with small banks, alliances with micro finance institutions, may be selectively also with some telcos, with e-commerce companies, asset management companies, insurance companies.Q: Those are tie-ups not strategic investments or mergers would that be on your radar?A: No, actually what we believe is that that we need to be agnostic and to participate in a larger business-to-business (B2B) community and a B2B to business-to-consumer (B2C) community and I am deeply convince as is our leadership team that we have the ability to scale our model on our own one and two through alliances.Q: So inorganic will not be.A: You know why because the quality filters are very important sometime you can get a good deal to buy someone, but then it creates a culture which has risk.Q: But there are quality MFIs today you will have to admit?A: Yeah, they are definitely bouncing back and we are lenders to most of them and we are very happy with the quality of the risk there.Q: So you are not looking in at inorganic relationships?A: I think we can build it on our own at a low cost.Q: Finally, since you are very close observer of the economic scene itself. How does it look to you while your bank has not borne the scars of the economic downturn? Is the economy itself turning around, I mean the sticky sectors steel, power, roads, infrastructure?A: If you do a stock take compare to one and a half years ago. If you look at each of the sectors you have mentioned, I can tell you there is a renaissance in roads, there is definitely a transformational shift when it comes to even the thermal power business and the new opportunities in the renewable energy business. When you look at the opportunity for urban infrastructure whether, its smart city driven strategies, there is new growth opportunity there. I think what we are looking at is a very significant correction of the past manifesting itself in future opportunities for banking. It’s just that there have been some gestationary skeletal in the banking systems which because of lag effect have got somewhat delayed, but for banks who have been proactive there is an opportunity in adversity to grow and grow with quality with the right filters in place.