Central Bank to reduce high-cost deposits, push retail lending

In the current scenario of rising interest rates and slowing economic growth, banks are facing a slowdown in the inflow of new corporate-loan proposals, increasing cost of resources and asset quality deterioration.

Mr M.V. Tanksale, Chairman and Managing Director, Central Bank of India, tells Business Line how his bank is coping. The public-sector bank is consciously bringing down the proportion of high-cost bulk deposits in total deposits, focusing on lending to retail, the priority sector and mid-corporate segments, and holding recovery camps for small-ticket loans which have turned bad. Excerpts:

On credit growth

More or less, we are growing in line with the industry. Credit growth is around 14-15 per cent on year-on-year basis. The story is similar on the deposits front. There is definitely a slowdown in credit offtake on year-to-date basis. While retail and priority sector segments are still better off, slowdown is seen on the corporate side.

Credit disbursement on the corporate side is happening mostly from the already existing sanctions pipeline. The existing sanctions pipeline is still good with us but new proposals are not really pouring in.

If at all proposals are coming in then we have reservations, particularly if there is a power project proposal. Firstly, we have to contend with the sectoral cap issue. So if the room is not there then we have to be very selective. Secondly, unless there are proper tie-ups (environmental clearances, raw material linkages, power project agreement, etc) we will not jump into the relationship. Thirdly, unlike in earlier times, if there is a proposal where we could commit to an exposure of Rs 300-400 crore, now we are committing to Rs 100-150 crore. This is for the simple reason that the room available is less and we would like to accommodate more number of players. There is no blanket ‘no' to anything. Even if it is a real-estate-development project, if it is in the affordable housing space then will look at it. But when it comes to commercial real-estate projects, I don't think we are looking at proposals from this segment at all.

Realigning

balance-sheet

We are sincerely working towards realigning our balance sheet by reducing the corporate loan component and increasing the retail and priority sector loan components. So, hopefully, some improvement will be there in the coming few quarters. The results will probably be seen by March 2012. We are very clear that our bank needs to focus on the bottom line rather than the top line.

I am moving across the country, talking to a cross-section of employees to impress upon them the fact that we are a bank with 3,800 branches, we have the requisite technology at our disposal now, and we have the complete range of products and services to compete in the market. We must work for a return on assets (ROA) of 1 per cent. If our ROA is required to be at this level then we will have to look at balance-sheet management properly — where are we loosing out on the income, where can we reduce the cost.

So, it is our constant endeavour to control costs. Obviously, when the high-cost bulk deposit component is reduced the cost of deposits gets reduced. We may not at the same time match this with the same proportion of growth in CASA (current account and savings bank deposits) or core term deposits but we can definitely reduce the high-cost deposit composition.

Reducing high-cost deposits and stepping up mid-corporate exposure.

We can definitely reduce the component of high-cost deposits in our total deposits to 30 per cent from about 33 per cent. Given a chance, we would really like to bring it down to 25 per cent or so by March 2012. It all depends on how exactly the scenario (liquidity and credit offtake) emerges. But we would like to keep it below 30 per cent. We would definitely like to maintain CASA deposits at around 32-33 per cent, which was the position as at March-end 2011, and probably cannot be improved in the current scenario.

But this can be improved by tweaking high cost deposits. If we are able to cap high-cost deposits then CASA deposits will go up, maybe, from 33 to 34 per cent. We are redeeming high-cost, bulk deposits. We will not be maintaining high liquidity just in order to show the balance-sheet size. We will not be worried about the balance-sheet size. We will be worried about the balance-sheet size only through retail liabilities and retail assets.

If we have to improve our yields (on advances) then we will have to selectively go for mid-corporate exposure rather than bulk exposure (large corporates) where the yields are really less. So, we will look to increase our mid-corporate exposure. We are not bullish on taking a Rs 500 crore exposure at the Base Rate. Our corporate-loans exposure is around 63 per cent, which we would like to bring it down to around 58 per cent. For retail customers, whatever rates we are offering are sustainable but for bulk customers who want something extra we cannot offer them that.

Non-interest income

Another avenue on which we are working on is non-interest income. We are developing the marketing team which will push third-party products. The importance of syndication and processing fee is being emphasised. For example, if we do one syndication proposal of Rs 500 crore for a public-sector undertaking, we don't get any processing fee. But if we do five syndication proposals of Rs 100 crore each in the private sector then we earn a good processing fee. So, we are very clear what we want to do. The results will be visible, maybe, after a couple of quarters.

Asset quality

We put our entire bank on the core-banking platform only in December 2010. So, we will be doing a part of the asset recognition through system as of September-end 2011 and remaining part we will be able to do in the next two quarters. This needs lot of data-cleansing. This is one reason impacting the asset quality (of banks). If there is stress on borrower accounts due to market scenario, restructuring has to be done under corporate-debt restructuring. For small-ticket loans, the best way to improve asset quality is to hold recovery camps and have very objective one-time settlement scheme. So, we recently revisited out one-time settlement scheme, particularly for the small-ticket borrowers (those with a loan outstanding of up to Rs 10 lakhs), look objectively at their repayment capacity and get into settlements fast. So, we don't hang on to the cases for years on end. If we can really improve the mechanism for recovery through recovery camps and have a proactive approach to the borrowers through settlements, the recovery improves. Borrowers also get enthused as they close the old loan and become eligible for fresh loans in the future. Some of the borrowers may have fallen on bad days due to circumstances as they could not generate sufficient cash flows to repay. So, the right approach is to proactively reach out to them rather than through the process of recovery mechanism through notices and court.

Capital raising

In April, we went in for a rights issue and raised almost Rs 2,400 crore. So, with that we are adequately capitalised. Unless credit growth goes beyond 20 per cent, I don't think we need any capital, at least till December. Up to 20 per cent credit growth is sustainable with the current level of capital. If at all some small capital dose is required, we will go through the qualified-institutional-placement route. Neither the current market scenario is conducive for capital-raising nor do we have compulsion. At least in 2011-12 we don't need any capital. In 2012-13 also we should be able to support ourselves because we have enough headroom available in tier 2 capital. If the credit growth is substantially good then I think the capital demand will really come up only in 2013-14.

Rising Interest rates Hurting growth

It is hurting growth in a way that probably people are not going in for investment credit. What is most important for the economy is that investment credit should happen on an ongoing basis and it is the consumption credit which should get calibrated which determines inflation. So somewhere if the consumption credit gets regulated and calibrated and the investment credit happens on a normal basis, I think, it will be good for the economy. Investment credit is definitely determined based on the interest cost because you have to decide for 15 years the internal rate of return based on certain assumptions. We all started with a base rate of 8 per cent a year-and-a-half back, today we are 10.75 per cent. So, for corporates who had factored in 8 per cent interest cost and maybe an interest rate sensitivity of 1-1.5 per cent, unless they are also able to transmit the cost, it becomes very difficult for them to manage.