“Housing sector, particularly, for another 25 years looks attractive to me…” - Views on News from Equitymaster

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  • Sep 22, 2003 - “Housing sector, particularly, for another 25 years looks attractive to me…”

“Housing sector, particularly, for another 25 years looks attractive to me…”

Sep 22, 2003

Mr. P. S. Shenoy is a CAIIB and possesses the rich 35 years of banking experience. Mr. Shenoy started his career with Bank of India (BoI) as an officer in April 1966 and rose through the ranks to head BoI’s operations at Hong Kong and New York. He was with BoI till 1998 and his long experience includes heading operations in international division, finance and group strategy covering, planning, treasury and monitoring of subsidiaries. Currently Mr. Shenoy is the Chairman and Managing Director at Bank of Baroda, one of India’s leading nationalised banks. He is also heading BoB’s subsidiaries, BoB International Finance and BoB Cards. Apart from this, he is a member of various committees constituted by the RBI and Indian Banking Association (IBA).

In an interview with Equitymaster, Mr. Shenoy gave his views regarding the Indian banking sector in general, and Bank of Baroda in particular.

EQM: What is your view on the current macro economic conditions in the country?

Mr. Shenoy: As far as macro economic conditions are concerned, there seems to be a feel good factor. Also, people are more comfortable with the stability in the Indian political scene, and are accepting coalition politics more than ever before. As far as the economic aspects are concerned, foreign currency reserves position is very heartening, both on the levels as well as composition fronts. As far as composition is concerned, what is heartening is the fact that as per the RBI less of “hot money’ is part of these reserves. The debt component of the reserves is also minimal.

As far as consequences of the high level of reserves are concerned, it has induced significant amount of liquidity in the market, which has led to softening of interest rates. Real interest rates are also down due to benign inflation. This is pushing consumption that in turn is driving investments in the economy. For example, the housing industry is currently driven by higher demand as well as low interest rates. Also, this year, we are observing setting up of new power and road projects. Capacities that have been created over the last 4-5 years have been getting exhausted, thus laying foundations for further capacity additions in the future.

Due to all these reasons, we are talking about GDP growth rate in excess of 6%. Another major factor in the Indian economic scenario is monsoons. Despite all the developments over the years the Indian economy is still largely dependent on monsoons, as a large part of its rural population depends on the agricultural economy. This year monsoons have been good and, consequently, the agricultural output is expected to improve significantly.

The convertibility of the Rupee is also encouraging, as the Indian economy is globalising and global efficiencies and positives are slowly being absorbed in. I also feel that the strengthening of the rupee is a positive sign. Earlier, one felt that only if the rupee depreciates Indian exports would grow. However, now despite the rupee appreciating the exports are growing. This indicates restructuring happening in the Indian economy. Our products are competitive per se and that need not necessarily be price related competitiveness. In fact, modernization in the Indian industry is likely to place it in a good position as far as competition is concerned. This indicates that the productivity of the economy is going up. So all these factor put together indicate a scenario where the economy has never had it better compared to any period in the past. So I would safely say that I am quite bullish on a faster growth of the Indian economy.

EQM: After a recent cut in bank rate what is your view on the interest rate environment in the country over the next one-year? Do you expect the bank rate to remain on the lower side in the coming years?

Mr. Shenoy: Having said that there will be pick up in consumption demand and credit demand consequently, the RBI's policy continues to support soft interest rate regime. All other factors like low inflation, high liquidity and easy convertibility of the Indian Rupee are also aiding a soft interest rate regime. Interest rates are converging globally.Even if credit demand rises, it is likely to have an inconsequential effect on the interest rates currently as the liquidity in the markets is still quite high enough to absorb the demand.

EQM: How do you see the Indian banking sector evolving over the long term?

Mr. Shenoy: I have a contrarian view regarding this issue, however it is factual of course. Let me take the US example, where there are over 14,000 banks including giants like Citibank and Bank of America. American banking is also called as unit banking where a bank may have a single branch in a city. So both types of banks, large as well as small, are surviving. What we see is that small banks are operating in a niche. For example there is a bank named as Marble Bank in the US, which has financial parameters better than the largest banks in the US. Financial giants may have a large number of products to mobilize resources, however smaller banks may have their own structured products and they may serve a local area. Small banks can offer plain vanilla products (fixed deposits, savings deposits and the like) that they can sell to the consumer class that does not want complicated products. In the Indian context, we are increasingly witnessing a scenario of consolidation and strong investments in technology. I still believe that there is place for both large banks as well as smaller banks offering their services in the niche segment.

EQM: How do you see the opportunities in corporate lending and in long-term finance, considering the situation where there is poor credit offtake from this segment and also that more of ECBs are being used for long term funding?

Mr. Shenoy: We are looking to increase the retail lending exposure, just like most other banks are doing. Earlier that sector was not being looked into, inspite of having a good scope. This sector is bound to grow. However, the concern at this point seems to be the overheating (high level of competition) in this segment. However, I would disagree to this. Housing, which is a large part of the retail loans, is facing an enormous shortfall of nearly 20-30 m units or even more. All the banks put together are not in a position to cater to this demand. So there is enough scope and this does not seem to be a bubble situation. However operational difficulties may always exist. I believe scope for retail lending is unlimited and this exists for auto loans also for a long time to come. The reasons for the same are the changing lifestyle of the Indian population as well as the soft interest rates. Housing, particularly, for another 25 years looks attractive to me, unless the macro economic scenario changes drastically.

We have looked at the resources, their costs and how we can deploy them efficiently. Our incremental costs are nearly 4.2%, and even if we get 8% or 8.2% we still have our net interest margin greater than 3%. As far as SMEs (Small and Medium Enterprises) are concerned, they are still in a position to pay. Due to higher margins, they are an attractive segment to cater to. Also, there is demand coming from traders and SSI (Small Scale Industries) units.

Coming to the corporate segment, they are not borrowing for two reasons. One of them is huge profits due to reduced interest costs, that has led to a surplus on the cash front. Large corporates have a demand for credit but at a rate. There is strong demand for credit at, say 6%. At higher rates they have recourse to go to the public directly or demand credit from their small and medium suppliers. Secondly, large corporates are incorporating just in time (JIT) methods, because of which the working capital needs are reduced. As far as capital expenditure is concerned, larger corporates are encouraging other to set up the plant. Hence corporate credit is present in an indirect way. It may just be a matter of time before companies do invest in higher capacities as demand itself is reviving strongly.

EQM: How do you plan to deal with increasing competition in the banking sector? Apart from the technology thrust, what other measures are you intending to take to counter this situation?

Mr. Shenoy: I don’t believe that private banks are taking away corporate demand. I believe that private banks have higher cost of funds, so on the price front they just cannot compete with us (the public sector banks). I believe that even private sector banks are finding it hard to lend to the corporate segment. I think that the corporate segment fixation needs to go away from the banking sector.

EQM: Please give us the details on the technology implementation plans (Rs 1 bn investment plan). When is the Bank planning to network all branches and start online banking?

Mr. Shenoy: The implementation is not over, however the visible part is ongoing. For example, the ATM network is already at a large size of 100, and connected. By March next year, we plan to take up that number to 500. Other than that, we have completed the business strategy part. We believe that our system is the most comprehensive and would give long-term value for the Bank. Computerization however is 100% on a standalone basis. Nearly 350-400 branches are already connected. However, I would not give much value to the connectivity part. Networking per se would not add much value, rather than when this networking would lead to centralized solutions, which are essential for the customer. Then the bank becomes one branch for the customer. That will come about by centralized core banking solution and the entire reworking of the customer relationship management function. We also need human resources as an integral part of the IT program. Change management is also important.

However, before all this, we need to know what exactly has to be done. There should be a strong business strategy. While we have been a little late regarding implementing it, our business strategy is one of the best in the industry currently. Around 1,000 branches under various lines of business will have their technology roll out shortly. We have chosen the systems integration route for that. From January onwards the roll out of the data and call center will start. It will take atleast three years for a major part of this roll out. The outlay has been nearly Rs 5 bn for the next five years.

EQM: What are your views regarding consolidation in the industry? Are you open to inorganic growth?

Mr. Shenoy: Once the voting rights condition is eased, consolidation would start with the foreign banks looking at acquisitions in India. Also, currently, public sector banks cannot acquire other banks. However if the rules are amended in the future, public sector banks will also be able to acquire other banks and this will further speed up consolidation. Also the government, I believe, would exit from the banking sector eventually. I believe that there is no reason for the government to be present in the banking sector. This is because the government can control everything without owning even a single share, as it can control the economic policy that everyone will have to follow, public as well as private sector banks. As far as inorganic growth is concerned, unless the regulations change, it is not an option for any public sector bank.

EQM: Is your purpose of going global chiefly to cater to the NRI community?

Mr. Shenoy: This is a Gujarat based bank, and Gujaratis are there everywhere. They are all traders. Particularly they are based in places like Kenya, Uganda, etc. So, we started from Kenya, then Uganda, and then we also opened a branch in London around 4-5 years back. Then we went to the US and Europe as well. So, initially when you go there (abroad), you deal with Indians who are particularly traders. Of course, we are graduating into doing local business as well. So, now we have started into retail banking in these regions and have also forayed into trade finance and industrial finance, both for the Indians as well as local people. We also have a global syndication centre in the UK where we raise finance for Indian corporates, we give them ECBs also, we also arrange for syndication. We have participated in domestic syndication as well as even for British and other corporates. So slowly, we are changing the complexion of our business. We are also looking at opening branches in Malaysia and China.

EQM: Do you see increasing international presence as a big factor going forward?

Mr. Shenoy: Now there is nothing like ‘out of the country.’ With globalisation, all boundaries will be gone, particularly, when the rupee becomes convertible. Wherever I will get the best return for my resources, I will go there. Efficient use of resources is now the sole consideration.

EQM: Are you looking at becoming a universal bank? Is it a slow evolution, or are you aggressive on that front?

Mr. Shenoy: Different people understand universal banking in different ways. Earlier financial institutions (FIs) used to cater to term loan requirements while commercial banks did working capital financing. Now, we have reached a stage where ‘harmonisation’ has taken place between the financial institutions and commercial banks, where they (the FIs) do working capital finance also and we do term loans also. In a limited sense that is universal banking. Further, it has evolved into a situation where we need to take care of the life cycle of the customer. Then, we have to have every product that he requires for his differing needs. So, when you have reached that stage when the bank is able to offer term loan, fixed assets loan, working capital finance, retail loans, etc., that makes a universe. From that perspective, Bank of Baroda is already a universal bank.

Now what is going to happen is that when we implement our core banking solution, it would give a critical mass to all these sub-activities that we are doing. It might take around five years for us to reach there, but when that happens, we would be a true universal bank in the proper sense of the term.

EQM: What is your vision for 2008?

Mr. Shenoy: Our mission is to become a national bank of international standards and augment stakeholders’ value, through care, concern and confidence. Last year, I made a statement regarding our vision for 2005. But now, that has to undergo a change because several factors have changed. However, on broad terms, we would be able to double our profits by 2008. The Bank would then be able to handle around ten times more business then now. We would be more competitive, more productive, much faster and more efficient. We also aim to make our Net NPAs at 2% by 2004 and Nil by 2005, and to keep zero NPAs onwards.

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