- 3 years ago
Defending Market Share by PSU Banks - Mr. Rajkiran Rai, MD & CEO, Union Bank of India.
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NewsTranscript
00:00 A very good morning to all of you. My colleagues from the financial sector who
00:21 are here, the senior executive team from the Outlook Group, ladies and gentlemen,
00:29 it is a pleasure to be here, engaging on an issue that is more relevant than ever.
00:38 Today, the air is thick with speculation on the role and relevance of public sector banks
00:45 which remain crossed in tangles of the politico-economic cycle.
00:51 It is an opportunity for me, rather, to exchange thoughts on how best to navigate
00:57 these uncertain times. I therefore convey my gratitude to the Outlook
01:02 Money team for handing me this opportunity today.
01:06 I would like to start with an overview of the banking sector's recent progress.
01:15 Some numbers. Let me give you a brief overview of our sector.
01:21 Banks dominate the Indian financial system with 63% market share in financial assets
01:29 of the system, rest being accounted by insurance companies which account for 19%,
01:34 NBFCs which account for 8%, mutual funds which account for 6% and provident and pension funds
01:42 for the rest. Commercial banks account for 92% of the total
01:48 banking sector's assets and other cohabitants of the banking sector include
01:53 cooperative banks, regional rural banks and local area banks.
01:57 Within the commercial banks, the public sector banks continue to dominate
02:01 with over 70% of market share of assets. While the PSBs continue to hold more than
02:08 two-thirds share of banking assets, they are gradually ceding the market share
02:12 to their private sector peers. I think that is the theme which I am trying
02:17 to throw some light on today. In fact, they had only one-third of the
02:21 share in credit dispersed last year. That means in the incremental asset creation,
02:27 the PSBs had one-third of the share. The theme of my talk today is to assess
02:33 whether PSBs can hold on to their market share given the enormity of problems
02:38 they face at present. The question is increasingly relevant with
02:43 the entry of new competitors like payment banks, small finance banks
02:48 and more unconventional ones in the form of fintechs.
02:52 At the outset, I would like to make a distinction.
02:56 When you talk of market share, it usually refers to share in business.
03:01 However, we should also be attentive to other important aspects like profitability
03:07 and market capitalization. Public sector banks have more than two-third
03:13 share of assets but make less than half of market share in terms of profitability,
03:19 even at the operating level. Even lesser is their market share in terms
03:24 of market capitalization. I think when we talk of defending the market share,
03:29 the next two aspects of profitability and market capitalization are very important.
03:36 I think defending that is more important than at the top line.
03:41 To my mind, therefore, the question we should be asking ourselves is
03:45 whether it is important to defend market share on the top line side or concentrate on profitability.
03:52 What will contribute more to profitability, whether it is loan growth or rebalancing of portfolios?
03:59 Whether retail will continue to be profitable?
04:03 Could there be more value-accretive segments like MSMEs?
04:08 These are the questions I would like to delve into to some extent today.
04:13 To get a holistic answer, let me quickly get through the long story of Indian banking,
04:23 which will help us to set the role and opportunities for PSBs in proper perspective.
04:28 Indian banking has witnessed an exciting phase of high growth during the last couple of decades.
04:36 We are the third largest economy by purchasing power parity and the seventh largest in nominal exchange rates.
04:43 We are also forecast to become the fifth largest economy this year.
04:47 Indian banks, particularly the PSBs, have played an important role in this journey.
04:52 The total asset size of the Indian banking industry has grown about 12 times since the turn of the 21st century,
05:00 from Rs 12 lakh crores at the end of March 2000 to Rs 141 lakh crores at the end of March 2017,
05:07 registering a CAGR growth of 16% compared to the average nominal GDP growth of 12% during the same period.
05:15 Consequently, business of banks, i.e. deposits plus advances, as ratio to GDP,
05:22 has almost doubled from 68% to 126% as of March 2017.
05:28 Balance sheet growth, however, has not always been reflecting into profitability
05:33 with improvement in efficiency and productivity.
05:36 The record here is checkered.
05:38 The return on assets of banks was 0.5% in 2001 and increased to 1% by 2012-13
05:47 and then set up a downward journey to 0.35% and may be even lower in March 2017 and in the coming years.
05:54 Profitability, more than anything else, is a function of interest margins and credit costs,
06:00 which is a measure of asset quality.
06:03 Gross non-performing assets, i.e. GNPAs, declined to 3.6% by March 2012, from 11.4% in March 2000.
06:16 We passed one cycle in that phase.
06:19 The demand for capital has only to deteriorate again to 9.3% in March 2017.
06:24 Stress is largely concentrated in the corporate book of public sector banks.
06:29 The capital strength, as measured by the capital adequacy ratio, however,
06:33 has improved from 11.4% in 2001 to 13.6% in 2016-17,
06:41 becoming qualitatively better under Basel III, thereby building resilience to downside risks.
06:47 Public sector banks played a very important role in nurturing growth and recovery
06:51 in the aftermath of the global financial crisis of 2008.
06:55 Credit expansion by the PSBs was much higher in the period following the onset of the crisis,
07:01 while credit expansion by foreign and private sector banks was significantly lower.
07:06 The PSBs' loan book grew three times to 52 lakh crore between the six-year period from 2008 to 2014,
07:16 noting a CAGR of 19%.
07:20 Significant share of incremental lending went into financing infrastructure.
07:25 The share of infrastructure in loan book grew to 15% from 9% as of the end of March 2008.
07:33 The PSBs are, to an extent, paying the price for their do-good nature in shaping the post-crisis boom.
07:41 Some of the investments, as it turned out, were not so well thought of.
07:45 It wilted with the turn of the economic cycle, with interest rates rising in response to inflation pressures.
07:52 Meanwhile, internal factors like policy stasis in government began taking a toll on large infrastructure projects,
08:00 delaying their completion and thus disrupting debt servicing ability of promoters.
08:06 PSBs were left with sore assets.
08:09 That is the social angle which plays out with public sector banks.
08:14 Public sector banks have been a messenger of hope for larger masses,
08:18 democratizing finance and empowering poor and underprivileged to shape their destiny.
08:24 Now there is at least one member in every Indian household who is having a bank account.
08:31 Besides, there is another aspect of inclusiveness in financing of millions of micro and small enterprises.
08:38 PSBs have been hand-holding budding entrepreneurs by holistically furthering government schemes like Mudra, Stand Up India and Start Up India.
08:47 There is no denying that these are hard times for Indian banking and public sector banks in particular.
08:53 A sixth of our loan portfolios remain under stress.
08:57 The burden of provisioning and haircuts is taking a toll on our bottom line.
09:02 More PSBs are falling under the prompt corrective action framework by every passing quarter.
09:08 As if these challenges are not good enough, there has come another dimension in terms of vulnerability to frauds.
09:15 Markets accordingly have hammered their stocks.
09:18 Price is half of the book value while private sector lenders trade at a price to book ratio of 2x.
09:24 However, some of this performance decline is indeed cyclical and will reverse in line with the recovery of economy.
09:31 The PSBs should retain their public sector nature,
09:34 supporting the weak and enabling enterprises at the bottom of the pyramid.
09:39 However, they should also find ways to do business profitably.
09:43 Being commercial undertakings, their performance is also judged on how they fare in terms of defending
09:49 and rather raising their market share in profitability as well as creating value for stakeholders.
09:56 Defending the market share
09:59 The economic transformation of India, supported by demographics, urbanization and industrialization,
10:06 will provide holistic opportunities for the banking sector, be it in retail, corporate or rural banking.
10:13 We are a fast-growing economy.
10:15 There will be space for everyone to do business and prosper.
10:19 Newcomers can grow without making it a zero-sum game for incumbents.
10:24 Business opportunities notwithstanding, there will be considerable heterogeneity
10:29 in terms of relative contribution to bottom line.
10:32 A focused pursuit of business will differentiate winners from laggards.
10:37 Let me explain.
10:38 When we do a profitability analysis, assuming a normalized business scenario,
10:43 we find that MSMEs emerge most profitable segments with thickest interest margins,
10:49 making highest return on assets of about 3.1%.
10:54 And highest return on capital employed close to 49%.
10:57 The MSME segment is followed by retail with a ROA of 1.5% and return on equity of almost 31%.
11:05 The large corporate with a ROA of 1.5% and return on equity of 25% follow that.
11:12 So retail and MSMEs are capital-light businesses, making it an attractive proposition for PSBs.
11:18 There is, of course, a risk dimension added to MSMEs, which call for PSBs,
11:24 investing in origination and underwriting capabilities as also specialization in terms of better collection mechanisms.
11:32 The finding of micro-analysis echoed by macro-analysis is done by McKinsey.
11:38 In its recent report on Indian banking, with new entrants like payment banks and small finance banks
11:44 enhancing competition for low-cost CASA resources,
11:47 loans will increasingly become a bigger driver for banks' profitability.
11:52 McKinsey estimates that loan share in the revenue pool of the banking sector
11:56 could rise by 11 percentage points to 58% by 2022, as against 47% presently,
12:02 while resources share could come down to 22% from 30% presently.
12:07 It is estimated that retail and SMEs together will be the largest contributors in the revenue pool of Indian banks by 2022.
12:16 Within corporate, mid-sized corporate will bring significant revenue opportunities for banks,
12:21 which have better bargaining power and more cross-sell opportunities.
12:25 Public sector banks have to seize this dynamic while outlining priorities for next 3-5 years' perspective.
12:32 Public sector banks have broadened the scope of delivery channels to ATMs,
12:38 internet banking, mobile banking and call centres apart from traditional interfaces like branches.
12:43 They have rolled out technology to the advantage of customers.
12:46 Next phase is about enhancing digitization and leveraging data for business efficiencies.
12:51 The PSBs need scaling up portfolio of digital offerings and workflow management,
12:57 both credit and operational aspects.
12:59 They should also look at co-opting fintechs in making a holistic offering for customers.
13:04 It should also help them withstand the competitive pressure from growing tribe of unconventional players.
13:10 With demonetization and goods and services tax, the process of formalization has expedited.
13:18 We are becoming a data-rich society.
13:20 It is time we build on to these gains.
13:23 The PSBs have massive customer base.
13:25 This wealth of information on customers could be harnessed through data analytics.
13:30 For example, our banks may shift from conventional balance sheet, cash flow analysis-based lending framework
13:36 to transaction-based loan appraisal.
13:38 Likewise, by leveraging technology, we could bring down cost of credit,
13:43 making more enterprises economically viable.
13:46 We could be more responsive in grievance redressal,
13:49 building mutually beneficial relations with customers.
13:52 Now I would like to touch on my bank, the issues which I mentioned,
13:57 we are trying to take care, how we are taking care in our bank,
14:00 I would like to briefly mention.
14:02 The Union Bank's journey.
14:03 As Union Bank, we have the satisfaction of navigating a challenging business,
14:07 while building strength in our chosen areas.
14:11 Union Bank has distinction of rising five notches in ranking of nationalized banks by assets.
14:17 We are now fifth largest nationalized bank as against tenth ranked couple of decades ago.
14:23 The bank achieved another landmark last quarter by crossing Rs. 7 lakh crore of business mix
14:30 with impressive loan growth of 13.5%.
14:32 More satisfactorily, our risk-weighted assets grew only through 3%.
14:37 It reflects that we are also growing qualitatively better.
14:39 That is the strength of our business.
14:41 We aspire to break into top three in domestic business by year 2020.
14:45 However, our primary goal to grow profitably by enhancing efficiency of current business
14:51 as well as extending presence in new revenue lines.
14:55 Accordingly, the bank made decisive shift in strengthening the balance sheet.
14:59 We have increased the provisioning cover significantly
15:02 while being compliant of capital adequacy norms.
15:06 On the HR side also we have taken certain initiatives.
15:09 Taking our horizon little further, we are building our people's capability
15:13 in terms of knowledge, skills and technological support to serve customers with responsibility.
15:19 There are interventions in making our processes efficient and people accountable.
15:24 Take for example credit underwriting.
15:27 The chances of default are low.
15:31 If you have credit underwriting, if you know everything about the customer,
15:37 if it is done diligently, the chances of default are very low.
15:41 However, in our system, processing used to be dispersed across branches
15:46 and proposals escalate through layers like regions, zones and corporate offices.
15:51 It is a time-consuming exercise and with quality subject to capabilities across different layers.
15:57 Branches in particular have little time to attend to details with diligence.
16:02 Our most day time is consumed in managing routine transactions.
16:06 As a result, new business as well as asset quality often gets compromised.
16:11 This needed to be changed through centralization to ensure speed of service
16:16 and quality through specialization.
16:18 Recently, the bank has opened centralized hubs called Sarals for MSME,
16:25 mid-corporate branches for handling mid-corporate business
16:28 and union samradhi kendras, particularly for rural and semi-urban centers,
16:32 for shifting the processing part of loans from branches to trained and specialized centers,
16:39 which are called hubs.
16:41 This works in both ways, by making branches free for monitoring and mobilizing new business
16:47 and also improve quality of processing and enhance due diligence.
16:51 Likewise, resources.
16:54 In a rising interest rate environment, for a competitive advantage,
16:57 acquiring CASA becomes even more critical.
17:00 CASA is a function of servicing through branches.
17:04 Better the service experience, more likely that a customer maintains relationship with the bank.
17:09 The bank is investing in mentoring youngsters with right kind of soft skills and customer service attitude.
17:16 As an organization, we are committed to providing holistic environment
17:20 for growth and well-being of our employees.
17:23 Winnan Bank has accordingly reimagined its approach to institutional learning.
17:28 The learning management system called Moodle, which stands for Modular Object-Oriented Dynamic Learning Environment,
17:35 leverages digital infrastructure to provide customized and progressive learning solutions for all employees.
17:42 It is designed to help create an online classroom setting with opportunities for rich interaction and collaboration with the learners.
17:49 Over 100+ e-learning modules have been developed by internal training resources
17:55 as well as industry experts across various domains of banking.
17:59 Employees have to pursue the relevant modules to keep abreast of developments in their field
18:04 as also equip themselves for future roles.
18:06 The learning progress is being mapped to their annual performance appraisal.
18:11 This would complement the conventional campus-based learning to make more informed and skilled workforce.
18:16 Winnan Bank has been vibrant with initiatives in digital banking.
18:20 Digital channels account for 73% of transactions, which is one of the highest in Indian banking.
18:26 Our ATM to branch ratio of 1.8 compares favorably with peers, including private sector banks.
18:33 Every month, the bank is coming with new products with unique features.
18:36 Our focus is to speedily scale up usage of digital channels like Umobile, Internet Banking, POS and ATMs.
18:44 These are big cost savers for the bank and add convenience to customers, resulting in higher satisfaction level.
18:51 Internally, we are leveraging digital through business analytics, performance monitoring and stress management.
18:57 To conclude, India continues to be a robust long-term growth story,
19:02 characterized by favorable demography, democratic polity, fast-changing urban landscape,
19:08 digital deepening and a rule-bound institutional setting.
19:12 Public sector banks, being the dominant stakeholders of Indian banking,
19:16 have both role and responsibility to finance India's growth story.
19:20 Government realizes the value of PSBs in India's macro perspective.
19:25 It has recently unveiled recapitalization plan of 2.11 trillion.
19:29 It has rightly used the recap opportunity to force structural shifts in the operating culture of PSBs through EASE agenda,
19:38 which stands for Enhanced Access and Service Excellence.
19:42 The EASE focuses on six themes of customer responsiveness, responsible banking,
19:47 credit off-take, PSBs as Udemy Mitra, deepening financial inclusion,
19:52 and digitalization and developing personnel for brand PSB.
19:58 I am happy to share with you that Union Bank has been already working along most of these areas outlined for EASE framework.
20:06 We have to scale up these initiatives fast.
20:09 Friends, these are exciting times for Indian banking.
20:13 The current challenges notwithstanding, public sector banks have been a force for good,
20:18 enabling growth of economy while democratizing banking for masses.
20:23 They have been through tougher times and have emerged stronger.
20:27 They will bounce back this time too.
20:29 Thank you.
20:30 [BLANK_AUDIO]
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