State-owned Bank of Baroda on Monday said that provisions on account of ageing non-performing loans are reducing and there could be some volatility in provisioning.
In an interview to CNBC-TV18, PS Jayakumar, managing director and chief executive officer, said the bank is on course to reduce non-performing assets (NPA).
Watch: Looking for a 6 to 8% return-on-equity this financial year, says Bank of Baroda
Jayakumar said the bank got good pricing on sale of Essar Steel loan as people believe there will be recovery.
Edited excerpts: Let us start with a bit of how you see this growth going forward. 20 percent domestic loan growth and even an overall loan growth that is positive. Is this maintainable?
I would think so. We have put together the necessary enabling infrastructure. We have got better distribution, improving productivity and ticket sizes are better. As far as corporate customers are concerned, a much wider suite of products, much more calling plan and a better target market. So on the balance, I would think, we should be able to maintain the growth and guidance between 15-20 percent for the loan book for this year.
Is your credit cost falling and at 1.7 percent, as per calculation, is on the lowest in last 12 quarters. Given the fact that you arrested slippages in the current quarter, how do you see credit cost panning out that you are on a provision coverage ratio (PCR) of 69 percent?
I would hope the net non-performing asset (NPA) numbers would come down barring some imponderables. I think, we should continue to keep on course to reducing NPAs, but I would rather wait for one or two more quarters before completely confirming that the NPA issue is behind us completely. The heartening fact is that our special mention accounts-1 and 2 (SMA-1 and 2) are also at the lowest level. So even if they slip, the amount in consideration should be lower also, as many of the National Company Law Tribunal (NCLT) and other matters are coming now closer to conclusion, so there should be certain amount of rebound coming from there. So when you juxtapose all these things with a reasonable conclusion, I would think that barring some surprises, we should be okay as far as the NPA numbers are concerned.
As far as provision numbers are concerned, there could be some volatility. They could arise because of the fact that some of the accounts are under review; forensic and other things and it’s possible that provisioning numbers are moved up but, that’s only a catchup if anything goes up in the next two quarters. It will reverse in the last quarter. So overall, we are looking for a reasonable growth, contained NPA and probably 6-8 percent return on equity in this financial year.
We have broken news that the Reserve Bank of India (RBI) has a fresh list of companies in second round of asset quality review. Can you tell us whether that will mean higher recognition for you or is it much higher provisioning than 170 bps indicates?
Let us wait for the exercise to get completed. We also have a set of list of names that we are in discussion with the RBI. In our view, the classifications that we have made are quite appropriate that additional provision is not required, but this is an industry wide review. So, when they get everything together, we will get to know about it. But as I say if something is increased in this quarter, then we can see the ageing provision subsequently reducing. So at the end of the day, as the year goes by, maybe we will be able to balance it out - that’s my expectation.
Is the provisioning likely to be higher than what you have guided for, in fact what have you guided for in terms of provisioning?
The guidance we have given so far as provisions are concerned is something in the plus-minus Rs 3,000 crore of what was reported in March 2018. We stay with the guidance. If anything, we should avoid the Rs 3,000 crore growth and we should be either flat or we should be declining, but we have to wait for that to happen. I think if we put right amount of work and some of the NCLT assumptions hold good, then we should come at those numbers.
Talking about NCLT cases, you are one of the major lender wherein you are the leader in consortium lenders. We saw in this quarter also your NCLT list one reduced, you saw some recover or that. How do you see the NCLT list one getting subsided in the coming quarters and by when can you see meaningful NCLT list to resolution?
Whenever a new regulation is introduced, there is certain amount of analogy precedence that need to get set up. There are arguments in the court, but by the end of this financial year, we should see reasonable closure – that’s the expectation from my side. But we have to watch for that and we have to be little bit patient in expecting results from NCLT.
Your NCLT exposure to the number of companies in the first NCLT list, 12 companies, has come down from Rs 7,000 crore to Rs 5,800 crore. Is this because you sold one steel company’s loan?
No. We had reduction on account of Bhushan. We did sell one more steel company loan, but that’s not reflected in the financials because they happened after June 30. So, it will flow through in this financial quarter.
How much will you exposure reduce in the current quarter?
I think we have a total outstanding of Rs 900 crore or thereabouts. It’s not very large, it’s a reasonable number, so we should see that declining.
We did hear that you sold your Essar loans for as high as 70 paise to the rupee or even more?
The pricing was good, because a lot of people expect they will get full recovery of their principal. But from our perspective, it is about reducing uncertainty overall in a total balance sheet. So as and when we get good prices, our intention is to sell. Though in theory, if you wait for some more time, the realisation may better than selling it out, but much of it is also about reducing uncertainty and also freeing up management time and focus on business.
One question on international book. This quarter we saw NPA increase over there. Could you highlight as to what happened over there and how do you see the recovery from those NPAs?
A little bit of it is on account to exchange rate changes that are there and some of them are of few accounts that slipped, but we do not see anything worrisome in the international book. If anything our coverage ratios are north of 70 percent, I think it’s around 75 percent and there will be some claw back that will happen. So for some period of time, these accounts are contained in SMA-1 and 2 and then at some point of time, they move forward but nothing that worries us that much. These are engineering, procurement and construction (EPC) contractors, these are certain other steel company subsidiaries. So, I think some of them are indeed in the process of resolution.
I know your growth is very good, but we are still persisting on asset quality for a couple of more questions. You have reported about Rs 4,700 crore in terms of slippages. How much of this is small-to-medium enterprise (SME), because many banks have reported higher and higher SME problems?
We had a specific disclosure on SME and the point is that our net flows from SME have been declining quarter-to-quarter on net basis, so the portfolio is reasonably stable as far as this is concerned. The other thing is that the approach is to originate loans from number of areas and also to focus on quality and much as we have done in consumer business in terms of score based lending. Something similar is also happening in the micro, small and medium enterprises (MSME) business as Credit Information Bureau (India) Limited (CIBIL) rating, which is very nicely rank ordering and we are just following the same.
That is for the henceforth, that is for the loans that have been originated under your tenure but you have inherited a legacy of loans and a legacy of problems, demonetisation and GST, therefore do you think that you can cough up SME loan?
I know there has been a lot of concern arising from the performance of the SME loan portfolio. I think what we think is reasonably containable as far as the total portfolio is concerned, our net slippages are actually reducing quarter-to-quarter. I think barring some the usual caveat, letting to some surprises, I think that we should be able to manage that quite well. There is also some classification changes that we have made because of the GST based recognition of NPAs. So some have got deferred on account of that and we just have to make sure that they would stay performing, but after factoring all of these things into account, I still think we are in a reasonable position as far as the SME is concerned.
One question on your loan growth that you are targeting between 15 percent and 20 percent or north of 15 percent, could you give a breakup in terms of corporate and retail, what are the kind of growth that you are seeing and are you seeing any capex based corporate loans coming up or we are still in the working capital cycle?
Let me put it this way, that because the corporate book is two times the next largest book. It always tends to, in an absolute terms, we want to grow similar to the retail book and that process of change is sometime away, but in terms of the growth, we still see a continuing 25-30 percent growth rate on the retail side. 15 percent growth rate on the SME side. We expect to grow our agricultural portfolio between 10 percent and 15 percent and then we expect the corporate portfolio to fill in and give us about 15 percent. But of course, we have the opportunity to accelerate the corporate growth. There are good quality credits that are available and also because of this NCLT and the decisions they are on, the company servicing the opportunity to consolidate the number of bankers they have and in the scheme of things, we would certainly count as one of the bankers that they would like to have in the portfolio. So in that sense, we are seeing an increase in steel exposure in our portfolio, but that is arising because we have now revised debt to EBITDA ratio for this company’s new set of ownership and the fact that they are reorganising their bankers and in the process, we are getting a slightly larger slice of the total exposure relative to what we had earlier lost - earlier got repaid from the earlier transaction.
Let me come to two issues that investors are looking at, most closely for Bank of Baroda, the first of them is mergers, is it out of the way or is it still an overhang? If you have to take on a weaker bank then investors have a problem?
Here is what it is. I wouldn’t be able to tell you anything specific. I don’t know anything more than what you know, but the fact is that should there be mergers, my understanding is that the capital issue of the companies that have merged with us would be addressed and it therefore would not result in a drag into a balance sheet.
That said mergers are also got cultural issues, it also got integration of systems, we also want to make sure the momentum in our business or the other company, other bank’s business is not impacted and so we have to do a number of things to manage them but at this point of time. I would rather skip this point, because I don’t have anything to suggest or not to suggest if a merger is on the cards. But I do think that the objective of any such merger would not be to diminish Bank of Baroda and whatever arrangements come in, will be after dealing with that equity level of capitalisation. But I don’t see anything in the immediate horizon that I need to talk about or explain.
As far as we are concerned, we are also preparing ourselves for merger not in the sense we anticipate it, but it is a good thing to do so. This includes building scalable backend operation, structures being able to build a lot of things on a plug-in play systems. So, if you do have any kind of merger, then we can handle the transition well. But there is nothing on cards or don’t report there is a merger, there is nothing that I know more than what you know.
But it is always good to think about this eventuality, because at the end of the day, inorganic growth is also a form of growth.
So three things you are telling us, one it is not imminent, in the sense you don’t know anything, you have not been told anything about it being immediate. Two that if it comes, it will come with the requisite capital from the government and three, you have built a backend, which is capable of absorbing inorganic moves.
Just a bit of a nuance correction to that, what I mean is I don’t have any news, that is what it is. So I would not keep speculating about it. Should that scenario happens, let us discuss it. Right now, it is not there. That is number one.Three, the process of building capabilities to deal with mergers is an ongoing process and it is also linked to our own process of a scalability of the architecture. That is where it is, but I would tend not to focus too much on the merger, because I think if it does happen and at some point of time, it should happen, the capital issues would be addressed and Bank of Baroda and the other banks should be in a position to be able to handle the transition efficiently.