Deteriorating asset quality, muted loan demand and stress on the margins led to a sharp decline in the earnings of public sector banks in the July-September quarter. Bhaskar Sen, chairman and managing director of United Bank of India, discusses with Somasroy Chakraborty the challenges faced by state-run banks and shares his plan to tackle these. Edited excerpts:
Do you expect credit quality to weaken further, as the business and economic environment continues to remain uncertain?
We have seen the worst in terms of non-performing assets (NPAs). I don't think there is much scope for further deterioration in asset quality. Banks have become cautious in lending to high-risk sectors. At the same time, efforts are being made to improve loan recovery. In our bank, we have given recovery targets to all regional offices and having video conferences to monitor the progress. I have written to chief regional managers to step up recovery. We’ve hired recovery agents. Borrowers understand that for fresh loans, they need to repay existing debt. I expect credit quality to start improving from this quarter.
High provisioning (for NPAs) led to a dip in profits of most state-run banks. Will the new provisioning norm continue to cap earnings growth?
The 75 basis points rise in restructured standard loan account provisions will have an impact on our profitability. I cannot give you a number at this moment but we do expect some impact on earnings.
Is there a scope for a sharp increase in your restructured loan portfolio?
We closed the July-September quarter with a Rs 4,200-crore restructured loan portfolio. By and large, we have completed restructuring of big accounts that required attention. There might be an addition of Rs 400-500 crore in our restructured loan portfolio during the rest of this financial year.
Loan demand has remained muted so far this financial year. Will you revise your credit growth target?
At the beginning of the year, we had forecast a 20 per cent growth in advances. We were on course at the end of the first quarter, when our year-on-year credit growth was 19 per cent. But, during the second quarter, it slowed 13.7 per cent. While we expect demand to pick up in the second half, we are revising our credit growth target. For 2012-13, it will not be over 17 per cent.
What’s your outlook on interest rates? Where do you see your net interest margin at the end of this financial year?
As long as inflation remains sticky, I don't think interest rates will come down. We have seen moderation in our NIM to 2.6 per cent in July-September quarter. We expect marginal improvement in our margin, as our cost of deposits are expected to fall by 10-15 basis points. The share of bulk deposits in our total deposits is 12 per cent and there might be a further reduction in these. However, any significant improvement in NIM is unlikely, as yields on advances are also likely to moderate.