The Outlook For The Banking Sector Was Never Negative

Registered on September 16, 1935 with an authorised capital of Rs 10 lakhs, Bank of Maharashtra commenced business on February 8, 1936. Known as a common man’s bank since inception, its initial help to small units has given birth to many of today’s industrial houses. After nationalisation in 1969, the bank expanded rapidly. According to information available on its website, it now has 1,421 branches all over India. The bank attained autonomous status in 1998. It excels in social banking and has a good share of priority sector lending with 38 per cent of its branches in rural areas. Excerpts from the interview:

What type of potential do you see for Pune city in terms of future investment?
Pune is basically preferred by retired people. There are two important factors to the city: one, a majority of the people here are highly disciplined and educated and two, it is an educational hub and therefore has a high percentage of student population. Therefore educational loans have good potential. Also, there has been a construction boom in recent times and the city has also emerged as an important IT destination. There are also a huge number of medicare institutions and government organisations in this city. All this has had the combined effect of creating a very high demand for commercial and residential properties. In financial terms, Pune therefore offers great scope for investments and returns.

How has this led to an increase of Bank of Maharashtra’s NPAs by 50 basis points in the last quarter?
Although the figure has increased, the gross NPA percentage has reduced. Similarly, the net NPA figure has[PAGE BREAK] increased but the net NPA percentage has reduced. This is mainly because the last fiscal has been one of recession. Well, not exactly recession but a slowdown of economy. This slow-down affected one of Pune’s major components – the SME sector that primarily comprises auto ancillaries. The industry has been passing through a bad patch and many of the players had to restructure their debt positions and payments were delayed. As per the Reserve Bank of India’s definition these would be termed bad debts but it does not imply that the money has been lost.

However, we have to make provisions for such situations and therefore whatever support and additional funding that we have given such industries would come under the head of NPAs. The scenario has been improving though and many firms have diversified to be able to come back on track. Further, a portion of the NPAs was also due to the rural economy’s stance of wait and watch because of the various agricultural relief schemes. Our bank had provided Rs 75 crore as agricultural debt relief and that reflected by way of our NPAs going up.

How is it that net margins have come down despite an increase in interest rate?
We have reduced our prime lending rate (PLR) and that has been one of the primary factors for a reduction in net margins. However, the net interest income has improved. The net interest margin (NIM) has taken a dip because the deployment of credit was not our level of expectations. Consequently, the money had to be deployed as short-term investments which suffer from low returns. This is also because short-term investment in mainly in liquid mutual funds to ensure liquidity and get reasonable returns. Our last year’s returns were to [PAGE BREAK]

the tune of 2.5 per cent compared to the call money of 3 to 4 per cent. But the return is not a compromise for interest. It comes as a redemption problem. To work out the NIM, the interest factor has to be taken into consideration and that is why they showed a fall.

Do you think that any further interest reduction is possible?
It has been done on July 6 with a 25 basis points reduction in lending and deposit rates.

What is your strategy for increasing the fee-based income?
We are going to extend our distribution of life insurance and general insurance policies for which we have tied up with companies like LIC and United India Insurance. Every branch of BoM has been given targets which will be closely monitored. We have recruited MBAs and marketing professionals to bring in new business. We are also going to focus on mutual funds because the market is now going through a turnaround. We also have the depository services of Central Depository Services Limited (CDSL). We have changed several of our business models and are aiming for 30 per cent growth this year from non-interest income and third party products. Last year it was 20 per cent.

What about core banking services (CBS)?
About 65 per cent of our business is through branches and up to 85 per cent of it is through the CBS. However, by December this year, we are going to provide VSAT in rural areas to improve the connectivity. We also have adequate trained manpower to handle this expansion.

How have you maintained your CASA (Current Account, Saving Account) at 42 per cent?[PAGE BREAK]

The sudden increase in CASA was due to bulk deposits of PSUs which were there with us for about a fortnight. However, that’s a one-off situation. Usually our CASA is at about 36 per cent and we hope to improve it by 1 per cent this year. To make this possible, all the branches have been given targets and our marketing personnel will visit PSUs and private companies to increase the salary accounts of its employees with our bank.

What is your capital adequacy ratio (CAR)?
We have a capital adequacy ratio of 12 per cent.

Is it low compared to your peers?
Not at all. Our Basel II is 12.05. It is neither less nor more but absolutely normal. However, to go by the challenges of the market, we need to push our CAR to 14 per cent plus and so we will have to expand our business by another 25 per cent. Since capital is a prime requirement to be able to do so, we announced profitability last year and increased the plough-back. The dividend has been reduced from 20 per cent to 15 per cent. It is only with more capital that we can increase our level of good assets and reach higher earnings. We plan to build up a retail portfolio of good quality so that the risk weightage is less. This will improve our CAR. Within the next one or two months we plan to have a central processing hub for retail assets.

Is there any plan for raising funds?
The requirement for the current year is enough for maintaining credit. But as part of our long-term business strategy we have approached the government with our capital requirement. We have asked for perpetual preference share of Rs 1,500 crore, out of which Rs 500 crore may be given to us by September while the rest will be over a period of three years. We could even go for a public issue if we feel confident about the market response.

What is the future outlook for the banking sector? And how do you plan to improve your performance?
The outlook for the banking sector was never negative because it plays the prime role of an intermediate. Our role is to channelise public savings to a productive sector through the assurance of good management [PAGE BREAK]

practice. Thus, risk management practice should be right and satisfactory as per the guidelines of the Reserve Bank of India. The key is to manage the competition and the slowdown in the economy. Reducing the costs and maintaining the margins are therefore prime elements on our agenda. We have a very strong treasury. Last year we booked Rs 190 crore as profit and we have already booked Rs 74 crore in the first quarter of the current fiscal. Thus, we are on the right track.

In terms of performance, there are other plans too such as client building exercises, opening another 75 branches and more ATMs, etc. We have recently introduced a comprehensive account opening customer kit so that when a customer walks in to open an account, he or she gets the account number and the debit card as part of the process instead of having to come again or wait for one or two months as was the case earlier. All our terms and conditions are also being revised to make them customer-friendly. This will improve our customer loyalty.