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Adapt to customer needs — IOB chief
S. C. Gupta
S. C. Gupta, Chairman and Managing Director of Indian Overseas Bank, has a vision for his bank, one of the very familiar names in the South and historically having a large presence abroad. In an interview with
C. R. L. Narasimhan, Mr. Gupta talks with great candour about the pressing issues that every bank, especially a public sector bank, must confront. The strategy as outlined by him is to leverage on the past strengths while adapting to the future. Another key concern has been the safeguarding of the managerial autonomy of the bank. PSBs need a level playing field, says Mr. Gupta.
QUESTION: Can you comment on the extent of competition in the financial sector today: not only between banks, but between various entities. Terms such as universal banking have become popular. What do you see the impact on a bank like yours?
S. C. Gupta: Well, as you have rightly said the competition is intense. Public sector banks, foreign banks, private banks, non-banking finance companies (NBFCs), well you name it — everybody is focusing on housing segment these days. There is a virtual interest rates war going on. However, I feel that there is a place for everyone. India is a vast country. The market potential is immense. I am an optimist. I firmly believe that a person performs better only when there is competition.
As you know very well, the slowdown in the economy continues. It is two years now since we were hit by the slowdown. The slowdown has been general throughout the world and is visible in almost all the sectors of the Indian economy. You see banks flush with funds. Avenues for lending in the manufacturing and trading sectors are coming down. Mind you, this is happening when we have the most industry friendly policies ever.
We also see deposits of banks rising at a better rate compared to the earlier years. This, I feel, has been partly due to the downward trend in stock markets and the small investors shying away from the capital market and the middle-class switching over to bank deposits. Another reason could be that interest rates on Employees Provident Fund, NSCs and PPF are also coming down.
Although the pace of growth in credit all around was sluggish, it was not so for IOB. During the current financial year as on September 20, 2002 while IOB's credit went up by 8.22 per cent the banking system grew by 4.58 per cent only.
The Universal Banking concept is yet to catch up in India. ICICI was the first Indian Universal Bank. We have not seen much talk of Universal Banking after ICICI. As it is, many PSBs, including mine, are already Category I Merchant Bankers, we do lead management of public and rights issues of companies, we do project appraisals, finance infrastructure projects, we act as trustees to debenture holders, we are issuing and paying agents for CPs issued by corporates, we collect telephone bills, direct and indirect taxes, we are participants in depositories, some banks including mine are taking up insurance agencies, we finance house purchase and like that many activities other than our core issues are already handled by us. So without calling ourselves a Universal Bank, we do many other activities handled by the universal banks.
Under the current economic conditions I feel that banks can increase their exposures in housing finance, retail credit, export, chemicals and infrastructure. This would help revive the economy also. Sure, the Government has to spend more on infrastructure and agriculture. But banks also can do their bit.
A related question — Universal Bank seems to be only a refinement of the ongoing disintermediation process. For IOB and banks similarly placed what are the opportunities and threats?
As I said earlier, many PSBs including ours already function as Universal Banks without their being called so. The recent SARFAESI Ordinance and the setting up of ARC (Asset Reconstruction Company) would go a long way in the banks shedding/reducing their NPAs sizably, for a price of course. As far as IOB is concerned we don't find any threat. In fact we find opportunities for growth only as I believe that one performs better under competition. Although technology will obviate the need for brick and mortar banking, physical branches with traditional delivery channels will continue to exist due to constraints of low literacy and awareness of the population in the Indian context. In a nutshell we can say, in the banking sector technology is finding its application in product delivery/access, productivity and performance, product design and above all adapting to market and customer needs. This can significantly add to the competitive advantage and promote the service to the clients. IOB's strength lies in our wide branch network, trained manpower and the personal rapport we have developed over the years with our customers.
Today size has become an important issue in Indian banking parlance. There are bound to be mega mergers and acquisitions. Even foreign banks with branch operations here have been permitted to acquire equity stakes in local private banks.
The three main challenges Indian banks would face are increasing pressure on asset quality, decreasing margins and competition. I feel that the next three to five years would be crucial for the Indian banking Industry. You will see PSBs also optimising their core competencies through strategic alliances or they also might go for the merger and acquisition route.
Banks, especially PSBs, are at the receiving end of certain developments including policy changes, for instance, the ongoing clamour to lower the interest rates. Considering the past legacy is it easy or prudent to keep lowering the rates on advances? What about depositors interests?
The Repo, call money and CP rates are hovering around less than 6 per cent. With the falling inflation rate, the interest rates on bank deposits is likely to come down. The last reduction in the interest rate on savings deposits was from 4.5 per cent to 4 per cent. That was in April 2000. Since then interest rates on long-term deposits have come down from around 11 per cent then to 8 per cent now. Lending rates of banks have come down. It is therefore logical that savings bank interest rates also come down. However I feel that there may not be further drop in interest rates on term deposits. The rates have bottomed out I think. PPF and other tax saving schemes interest also have come down. You cannot go on reducing the interest rate on term deposits. Already there is loud talk from the public that there are no avenues for investment by retirees and pensioners. Government has social obligations.
The banking industry is already flush with funds. Further reductions in CRR (Cash Reserve Ratio) are likely to put more funds at the disposal of banks. With the fierce competition around, lending below PLR (Prime Lending Rate) is increasing day by day. The Reserve Bank of India has reduced the Bank Rate also from time to time. It now stands at 6.50 per cent. This is the lowest since May 1973. There are indications in the Monetary and Credit Policy for 2002-03 that the Bank Rate would be lowered on the basis of general economic condition. Lending rates may go down further. As I have already said, the margins of banks are shrinking. Banks will have to improve their yields by offering better and quicker service, expand their non-fund based business, launching aggressively into internet banking and looking for other avenues like selling insurance products and improve their profitability. Cost reduction and cost control, use of technology more and more in delivering their products would be talked about and implemented in PSBs in the coming years. The recently introduced VRS has right sized the staff strength in most banks.
In fact the current environment calls for utmost thinking of PSB managements to articulate a strategy for survival and growth; for instance special inhibiting factors on PSBs like CVC and CBI have not been addressed still.
As the PSBs come under the purview of the Banking Companies (Acquisition and Transfer of Undertakings) Act, CVC guidelines would apply to banks. As far as IOB is concerned I have articulated at every available forum that all bonafide decisions would be protected and that the field functionaries need have no fear in taking decisions. This has been demonstrated to them.
There is a perceptible change in our bank in the mindset of the officers in the last year and a half especially. Performance is rewarded by promotions. Any vigilance case is viewed not in isolation but on the overall track record of the employee and the circumstances of the incident or case or allegation.
All said and done banking business is altogether a different commercial business. We are living in a fast changing world. I believe that the Government is also seized of this matter.
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