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 on the current scenario in the banking industry, the CRR cut and the management’s vision for the bank over the next four years.
EQM: What is your view on macro economic scenario?
Mr. Shenoy: The situation is definitely tough. It is likely to have some negative impact on asset quality of banks. For Bank of Baroda (BoB), the ratio of net NPA to advances has however declined by about 25 basis points to 6.52% in the last six months (6.77% as on March 2001). Strict monetary control, one time settlement scheme and NPA consciousness would keep the asset quality under check. Although, the situation is expected to improve in the coming years, but in the near term a slowdown in the industrial activity would surely impact the asset quality of the banking sector.
EQM: How do you view the current monetary policy?
Mr. Shenoy: It’s a progressive policy, more forward looking with more and more reforms put in place, particularly for CRR. By removing all the exemptions while calculating CRR, the RBI has brought the rate in line with the International best practices. Apart from this, enabling financial institutions to become universal banks is a major highlight of credit policy.
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: It is not necessary that an interest rate cut would generate a demand for credit. A credit offtake is not a function of interest rate alone. It is also not a function of availability of credit or delivery of credit. There are several other factors, which should be present before the actual credit offtake takes place. It has been already mentioned in the monetary policy that interest rates are likely to remain soft. CRR cut would generate more liquidity in the system. Since there is no demand for credit in the system, a rate cut could help to an extent in generating demand for funds.
EQM: The RBI has indicated variable interest rates for long-term deposits. Your comment on this.
Mr. Shenoy: Variable interest rates were there earlier and some of the banks had introduced them also. But the markets do not favour these kinds of interest rates. People in general like to have fixed interest rates. For depositors, certainty is more important, as they would like to know after a certain period what would they earn on principal amount. In fact, as of now there are no variable rate securities available in the markets. It would be difficult to change the psychology of people in the short term. However, increasingly interest rate are becoming volatile and some beginning has to be made. Although, general preference is for fixed income, we are working on variable interest rate instruments. Even the RBI is planning to introduce variable rate securities in the near term.
EQM: What would be the percentage increase in the bank’s earnings with a reduction in CRR?
Mr. Shenoy: Benefits of reduction in CRR have not come to many banks since all exemptions are removed. It has been actually negative for some of the banks. So to compensate this negative effect of CRR cut, there is a possibility that deposit rate might be reduced. BoB would gain around Rs 210 m due to CRR cut but there would be negative impact to the tune of Rs 50 m because of removal of all exemptions. This might be the situation for most nationalised banks. Although, deposit rates would be cut, lending rates are not likely to come down as banks are already lending at sub-PLR.
EQM: How do you see the opportunities in the corporate lending and in long-term finance, as bank will now have more funds to offer?
Mr. Shenoy: The current economic scenario is not that realistic and encouraging compared to what it was earlier. Overall growth in GDP has come down and industrial activity is also on the lower side. The growth in the service segment, which contributes around 50% of GDP, has also been impacted severely, particularly after the September 11 attacks on the US. Banking being the proxy to the economy, the downturn in the economy is reflected in the banking business.
The first half of the current fiscal was not very encouraging but in the second half we believe that the economy should start turning around. This would be on the back of good monsoon and consequently good agriculture growth, which would lead to a pick up in rural income and demand for credit.
EQM: Forex income accounted for about 19% of the bank’s other income in FY01. With increasing competition from private banks, this revenue stream is witnessing a decline. How do you plan to manage the growth from forex business?
Mr. Shenoy: We will have to be competitive and refine our rate. We also plan to increase the volume of business since the limit (bank guarantee and letter of credit) that we have sanctioned is not fully utilized. Its utilization is just around 40%-50%. So to make them fully utilized, we plan to offer competitive rates, which would improve volume of this business. Also, due to fall in exports, income from forex has remained on lower side in the last few months. On the other hand our cash management product is doing comparatively better. We have achieved a turnover of Rs 300 bn where we needed Rs 100 bn business to break-even.
EQM: Please give us an insight into BoB’s industry wise classification of loan portfolio
Mr. Shenoy: We have totally diversified credit portfolio into 28-30 industries. Textiles, chemicals and commodities sector however, account for 6%-8% of our total credit. Since credit offtake in corporate sector is not picking up, we are focusing on retail sector. Retail credit demand is picking up at a rapid space. It accounted for 6%-7% of total credit as on March 2001 and is expected to account for about 8% of total credit in the current year. We might revise our targets upward for the retail credit to 10% of total credit for the current fiscal. This is due to the fact that margins are higher in this segment, risks get diversified and recovery rate is faster. Housing finance particularly is doing very well with a portfolio of Rs 10 bn and we plan to expand the portfolio further.
EQM: Please throw some light on your plan to become universal bank? The bank had indicated its aim to enter into life insurance, asset management, cards, capital market advisory services and primary dealer (PD) businesses earlier. What is the latest on these developments?
Mr. Shenoy: We are in the process of getting in principal approval from the RBI for starting life insurance business. We have already appointed a leading investment banker to advise on the strategic partner for both insurance and asset management business. Once the subsidiaries in asset management and life insurance are operative we would become a universal bank. The difference between ICICI Group and us is that we don’t have subsidiaries catering to critical mass and we need to create a strong brand. Apart from these, we have got licence from the RBI to start primary dealer (PD) business and already have a card subsidiary. We are into card acquiring business but now we are planning to focus on the card issuing business. We have around 25% share of the card acquiring business and the market is growing at the healthy rate. In card issuing business the bank gains income in the form of service charges. Whereas in card acquiring business, the bank acts as an intermediary between the card issuing company and a merchandiser and gets commission for providing the services. In our capital advisory business, currently we have 10 new assignments and we are planning to start PD business in this subsidiary only. Our PD business is expected to start sometime in December. Thus, our universal banking model is already in place. It’s only a question of giving further push to these non-banking arms. For all practical purposes among the nationalised banks, I think SBI and BOB are comparable to universal banks.
EQM: Please give us the details on the technology implementation plans (Rs 1 bn investment plan). When does the bank plan to network all 2,600 branches and start online banking?
Mr. Shenoy: By the end of March 2002, we should be utilizing the limit of Rs 1 bn. This would be to network 1,000 branches, which contribute 80%-85% of our total business. Currently, 250 branches in 7 cities are networked (intra-city). We will be extending our IT plans to inter-city in short time. Thereafter, core-banking solutions - RTGS (Real Time Gross Settlement) and web enabling of cash management products would take place. We don’t want to install ATMs in near future as we might get the cash dispenser at cheaper cost in future or we could also utilize the network of ‘Swadhan’. I think by March 2003 we should be able to start online banking in a phased manner.
EQM: The bank’s recent decision to merge Benares State Bank (BSB) is likely to affect its financial performance. This is considering the fact that BSB has made net losses in the last few years and has turned insolvent with negative net worth and negative capital adequacy ratio. Which factors do you think have influenced BoB to merge with BSB? What kind of synergies do you see in this deal?
Mr. Shenoy: We have made offer to BSB on the condition that the losses will not devolve on us. We already have strong business in Uttar Pradesh with 500 branches. Addition of 105 branches from BSB would help us in gaining market share further. The cumulative net loss of the bank will be taken care off by DICG (Deposit Insurance and Credit Guarantee). Through this acquisition, we are getting the large customer base of 1 m and most of them are retail clients. Also on the liability side, deposits are mostly from the retail segment. I think the merger with BSB should take place before the year-end. But as I said it would not affect the bank’s financial performance significantly. Since BSB’s networth is eroded, it would be a pure amalgamation without paying in cash or stock.
EQM: What is your vision for the bank in 2005?
Mr. Shenoy: We expect a growth of around 150% in our size in the next five years. In terms of financial performance too, we expect to record a triple digit growth in profits during the same period and an uncontested number 1 position among the nationalised banks.
EQM: A word on your favourite book…
Mr. Shenoy: One book, which I like reading constantly, is Bhagwadgita. The book is nothing but the conflict of human mind and the turbulence, which the human being goes through on a day-to-day basis.
EQM: Any personalities that have influenced you…
Mr. Shenoy: Frankly speaking I am not an idol worshipper. But one leader who has influenced me is Mahatma Gandhi. Although, I am not his follower, but his thinking process is unparalleled in the world.