Banks may have to ration credit flow to some sectors

This fiscal has so far been an eventful one for VP Shetty, the CMD of IDBI. He took over as chairman of Indian Banks Association (IBA) at a time when loan growth was at a record high. On the way, IDBI acquired United Western Bank (UWB) in the face of competition from other contenders.

How do you expect the banking industry to manage high credit growth given the slow pace of deposit growth?

There may be a few sectors where the credit could be postponed and somewhere credit can be rationed. Each bank will have to take a call on this. Credit cannot grow at 35-40% every year. Each bank will lend to the extent threshold is available. Because of certain restrictions imposed on housing and capital market-related advances, there has to be some slow movement of credit to these sectors. I don’t think there are any problems for loans to manufacturing and infrastructure sectors.

But, my worry is on the huge amount of investment required for infrastructure — $350 billion — and that the figure is getting enhanced at various meetings. Unless we have proper rationing of credit, it may become difficult for Indian banks to provide that kind of credit. We also need to mobilise more domestic savings, especially in rural and semi-urban branches, where the formal channel of routing savings has not penetrated to that extent.

People still keep money in houses, with chit funds and various other unorganised sectors. Bankers need to educate people. With 18-19% growth in deposits and that most banks have exhausted SLR securities, liquidity will become difficult in days to come. Those banks, who have stretched beyond their means in terms of resources, would get into serious problem.

What are the major challenges the banking sector faces?

Resources mobilisation is one of the major challenges. How to make bank deposits attractive is a major issue. Besides, deepening of banking services is also imperative, including `financial inclusion’. Banks would have go to unbanked areas and open branches. Another challenge is technology, now that each bank has its own technology platform. It’s time that we have a single technology platform for all banks.

The important area that also needs to be looked at is retaining and acquiring skilled manpower. There is a 30-35% attrition rate which is not only in the public sector, but also in the private sector. The banking sector will face challenges in 2009 after the domestic sector opens to foreign banks. Upgrading the manpower skill will be the key.
Also, given the credit growth we have seen in the last three years, we need to prepare for a cyclical downturn. Credit monitoring exercise is something that the industry will have to undertake extremely carefully.

What have been the challenges in retaining manpower?

A key fallout of the merger process is the large-scale attrition that it brings along with the integration. Almost 800 employees have resigned from their positions in IDBI Bank over the last nine months. However, we have recruited close to 900 employees during the same period and are currently in the process of taking in another 1,000, which includes fresh graduates from B-schools and 200 lateral recruitment.

The salary structure would be based on IDBI’s terms, which are better than the other PSU structures. Banks can benefit immensely from the recent initiatives of the government which allow banks to incentivise officers by offering them a small percentage of the profit earned.

Other directives such as cadet path progression, wherein each bank has its own promotion policy for fast track movements will also help banks retain skilled manpower. The financial services sector is growing at a burgeoning pace, which will make it more difficult for banks and FIs to attract and retain talent, due to opportunities available in other markets.

How has been the experience of IDBI with the two mergers — IDBI Bank and UWB?

Mergers are something that the banking industry is likely to face increasingly over the next few years, with consolidation on the anvil. In the last two years, the two mergers, which we have conducted, have been totally diverse experiences. In the case of IDBI Bank, it was altogether a new generation private sector bank getting into the fold of a public sector entity. Almost everything ranging from the work culture to the manpower and from pay packets to service conditions were poles apart.

United Western Bank has traditionally been the most active player in western Maharashtra, with fewer branches outside the state. Taking into consideration forces at play in UWB, most of the factors such as work culture, branch network, nature of business, pay packages and service regulations are akin to those of a public sector bank. We have almost completed the exercise of IDBI Bank’s integration except the final part (in terms of salaries, allowances and seniority for all employees) which is likely to be in place by April 1, 2008.

This would mean that all employees would be brought under IDBI payscales. The original scheme provided for a package of three years, and hence will expire on April 1, 2008. By April 1, 2007, all three entities (the development banking SBU — IDBI, the commercial banking SBU — IDBI Bank, and the merged United Western Bank (UBSBU), will migrate to a single IT platform, Finacle.

The market perception is that IDBI is often a late entrant in various segments of the financial sector. How does IDBI plan to compete with its peers?

Despite being an extremely late entrant in the insurance business, there is sufficient amount of untapped potential, given the low levels of penetration. The deal for the insurance venture has already been finalised and we are looking at selling the first policy somewhere around April 2007. Though we may make a delayed entry into new fee-based businesses, our relationships with domestic corporates will help us gain sizeable marketshare.

Indian corporates are increasingly going global and funding their overseas plans may be a constraint for local banks. IDBI does not have any overseas presence and does stand to lose out. How is the bank addressing this issue?

We have made a strong pitch for opening overseas branches. In the next six months, we will have branches in Singapore and Bahrain. We are looking at establishing representative offices to begin with, in markets such as Shanghai, Moscow and Dubai.

The Stressed Asset Stabilisation Fund (SASF) was launched with the aim of helping IDBI clean up its books? How has the recovery record been?

Since SASF was formed in January 2005, we recovered Rs 135 crore during the first year, in the second year it was Rs 650 crore and third year — that is the current year — we may touch Rs 750 crore. Every year, in the month of February, the money would be paid to the government and to that extent the bonds would be redeemed.

What is IDBI’s strategy to protect its margins, considering that you have to lend at competitive rates, although your cost of borrowings are still very high?

Margins will continue to be under pressure. One thing that needs to be understood is that we are a public sector bank that just got converted from a financial institution. And secondly, we have a specific developmental role assigned to us. But at the same time, we are looking at increasing volumes that will help in increasing income. Our strategy is also to increase our current and savings account.