Interview | Wealth management a major focus; credit costs may fall again – BoB chief

When it comes to the banking sector, the kind of uncertainty we had at the beginning of the last financial year, when the first wave came, was much more. We did not know whether we were going to have a vaccine or not. You did not know how long the lockdown might be. You did not know, again, what would be the impact on corporates. A lot of these questions have possibly been answered for us. We are fairly clear now that the impact on the corporate segment seems to be limited.

How is the broader economy responding to the COVID-19 crisis? Where is the pain seen?

Large portions of the economy are functioning very near normal, which is why you see stock markets where they are.

Having said that, there is an impact on some segments and particularly when it comes to MSME (micro, small and medium enterprises) and retail, there would be an impact. But that impact is as much because of health outcomes. For instance, in this current second wave, it’s not that there have been large-scale layoffs, but the personal finances of people may have got impacted because of health costs. That is something which would suggest to me that when it comes to the books of banks, it could depend on the nature of the book. So, if I have a very high proportion of, say, unsecured personal loans, then there is a vulnerability. 

Can you speak from the BoB point of view?

For a bank like Bank of Baroda, 50 percent of the book is corporate, and it has not been impacted very significantly. Another 15 percent comes from agriculture, where we expect a normal monsoon. When it comes to retail, our experience is that people are very reluctant in terms of sullying their credit scores because of any kind of restructuring. So, last time, for every 10 borrowers we offered the restructuring to, only one might have said yes. So, we might see people falling back in some payments by a month or two, but a large proportion might want to not go for restructuring. But should somebody’s personal finances be impacted because of health costs in the family, and there is large number of families which have been impacted, then the instrument of restructuring has been made available by the RBI (Reserve Bank of India).

You spoke about MSMEs. Do you expect big restructuring in this division?

Like I said, the segment which has been impacted most is MSME, and there we have been able to mitigate the impact last year also through the restructuring window, and I expect this year also, we would see significant restructuring. But in terms of the overall book of the bank, despite what we saw last year, credit costs came down and this year, given the fact that the contours of the problem seem to be fairly clear, our guidance is that we might actually see a further reduction in credit costs for the year.

As you said, many families are impacted by medical expenses and critical job losses. Will retail demand suffer?

Absolutely. That is a possibility and there is no doubt about that, and that’s something we will see as we go ahead.  We would want to chase the best borrowers by offering them the best rates, which is why even last year, you saw that our growth in terms of organic retail was 14 percent. Within that growth, we saw segments that grew much faster than the market. For instance, our gold loans grew 25 percent and car loans 27 percent. Therefore, I would believe that if you are tightly focused on the segment which you are comfortable with, and you are willing to make sure that you give a good deal to the customer -- the best customers deserve the best rates -- I think there are still avenues available for a bank of our size to grow faster than the market.

So, possible, as you say, the market growth rates might come down, but I still believe there is opportunity for us to grow our retail faster than the overall growth rate in the loan book and grow retail faster than the growth rate in the corporate segment.

What is the growth expected in retail business?

We would mostly like to grow in line with the industry, but, we will stick to quality. So, our overall growth was 5 percent, but organic retail was 14 percent, gold loan was 36 percent. So that’s pretty much what we’re looking at. If the industry grows anywhere between 7-10 percent, we grow wherever the industry grows, whether it’s 7 percent or 8 percent, but in our chosen segments we want to actually make sure that we gain market share.

Is it fair to assume that your strategy on retail will be through organic growth?

The pool purchases have come down. That’s on two accounts. It is the organic portfolio which is driving growth and we would want to make sure that that remains the case for a few reasons. When you are in uncertain times, whatever is directly underwritten is something you have much better control on. If you have the capacity to achieve organic growth, then that’s what you should do. We believe that we have been able to demonstrate in the last year that we have the capacity to grow organically. So, we’ll keep the focus there.

Could you elaborate on the strategy on corporate business side?

We don’t allow growth imperatives to make it a race to the bottom, either in terms of credit quality or in terms of margins. We have been able to keep our margins intact by keeping discipline in terms of the deposit franchise. Almost the entire growth of deposits has come from CASA (current, savings account deposits). So, we have had de-growth in bulk deposits, 3 percent growth in retail deposits and 16 percent in CASA. We want to keep that discipline. Similarly, in wholesale also, we make sure that we grow where there are margins with justified risk.

Where do you see the opportunities?

I do believe there are opportunities because there’s public investment happening, for instance, in terms of road infrastructure. There are also existing customers of ours who are making brownfield investments. There also seems to be a secular trend in terms of the largest borrowers trying to consolidate their borrowing arrangements. So there is, again, scope for us to grow there. I believe we should be able to have positive growth there. It’s tough to hazard a number. Maybe when we move into the second quarter, we can have some kind of prognosis about what kind of growth we should see, but we would want to make sure that it is disciplined and we don’t compromise either on margins or in terms of credit quality.
The RBI circular stating that only lending banks may open current accounts for large borrowers has helped you grow your CASA better. Can you tell us a little more on that?

It gives you an enabler in terms of attracting a customer, but what really moves the needle in terms of the balances of your larger customers is having a robust cash management arrangement with them. And that’s where we’ve been able to make a big impact. Our fee income from cash management has grown 75 percent y-o-y. We believe that’s something that we will be able to sustain. It’s important to appreciate that we were very late starters. So, every new customer that you get, you are getting from somebody with whom they have an established cash management arrangement, and that is normally either the largest public-sector bank or the private banks or foreign banks.

We are very competitive there and I believe that’s a momentum we can sustain, and that is also in part responsible for the current account growth, which is 20 percent y-o-y.
Have you had to invest in additional tech infrastructure in that department?

That’s something which happened over the last two or three years. Now, what we are trying to make sure is that the corporate relationships that we have, we are able to leverage them to get business from those corporates because at the end of the day, you have about a seven percent market share in terms of corporate lending. BoB is the second largest corporate lender after SBI. So, we are very well-positioned to make sure that we demand our rightful share in terms of the fee income of the corporate.
How helpful is the new restructuring scheme for borrowers?

There are two things which could have happened. One is that there’s a company which did some restructuring but again you have had the second wave and therefore your assumptions have gone awry. The other possibility is that there’s someone who escaped the first wave but got impacted by the second wave. So, the fact that very early in the second wave the Reserve Bank of India has come up with this dispensation which allows you a) to again look at companies which got restructuring within the overall ambit of what kind of restructuring is possible, and b) again, that you can look at companies up to September. That gives us a window which is wide enough to take care of whatever is required.

Number two, in terms of processes of the banks, identifying borrowers, interacting with them, reaching out to them, they have been tested and they have been laid out in the first wave. So, the possibility of our accessing borrowers in time, making sure that we have tailor-made solutions for them -- that is now much better. I’m confident that wherever there’s stress, the current dispensation allows us to address that stress, particularly given that corporate stress is not such a challenge this time. In retail, borrowers are still going to be selective in terms of choosing to get their loans restructured. The focus on MSMEs is going to be there very strongly.

How much of the book might you have to restructure incrementally?

Tough to say, except that I’d like to point out that last time, when we did restructuring, 70 percent-odd came from corporate, and that is no longer part of current calculations. So, the overall restructuring should be lower as compared to last year.

Any concerns on the performance of assets restructured last year, especially from MSMEs?

It is early days and the second wave is just a few months old, although we have seen so much grief and suffering in the last few weeks. But all told, it’s still one-and-a-half or two months. So, we’ll maybe give it another month before we make an assessment and the possibility of addressing those issues is obviously there. 

How many employees have you lost to the pandemic?

This is something which is very, very painful, but the fact is that the bank has paid a very serious price. When things are so sensitive in terms of the personal lives of people, I’m not sure discussing numbers would be the right thing, but it has been a very heavy cost that the bank has paid.

Do you feel the need to beef up provisioning from these levels and raise capital for that?

I don’t believe so for two reasons. One, in terms of the provision coverage ratio, it continues to be very high. Including technical write-offs, it’s about 80 percent. Also, our current prognosis is that credit costs should start coming down, mostly because of the impact on the corporate cycle. So, as of now, we are fairly comfortable and confident, both in terms of what we believe are internal accruals and also what likely credit costs are. But, of course, we have all approvals in place. So, should we find by the end of the year that things are very different from what our current estimate is, we’ll look at it again. For the moment, we are reasonably comfortable in terms of where the book stands and the provisioning levels that we carry.

You have been implementing an operational revamp with McKinsey as the consultant. What’s the progress on that?

There are multiple aspects to that revamp. One of the things we are looking at, for instance, is making sure that we make progress on the digitalisation of our interface with the customer. That’s something which is rolling out very well. We’re also looking at things like wealth management, where BoB is very well-positioned because of our footprint which is very strong in the southern and western part of India. 

Can you elaborate a bit more?

Nearly a quarter of our deposits actually come from our high net worth customers. So, there’s almost a private bank that sits within BoB. So, we are focusing on wealth management in a very significant manner. We’re also seeing how we can reorder our footprint because how you do business with banks has changed entirely. I don’t think you’ve visited a bank branch more than once in the last six months, and that goes for a large proportion of our customers. So, we need to make sure that our footprint is aligned to the way our customers do business with us. So, we’re looking at increasing our business correspondent numbers, looking at branches very carefully (to see) whether we require them, whether we can shift the footprint and make them more customer-friendly in terms of the kind of business the customer wants to do with us. We’re also looking at the workforce in terms of how they would want to work, whether it is working from home or hybrid models. So that project is going ahead because we are seeing banking change before our eyes.

Have you identified any assets for transfer to the National ARC?

It’s still early days. If we were to have this conversation a month from now, we might be more specific. There’s a company that needs to be formed, which will tell us what their appetite is, like any other ARC and after that, we can identify the assets.