`M&As seem a reality among public sector banks' -- Mr S. S. Kohli, Chairman and Managing Director, Punjab National Bank

Sarbajeet K. Sen

After a successful three-year stint at the helm of the Punjab and Sind Bank (PSB), which turned around sustainably, Mr Surinder Singh Kohli took over as Chairman and Managing Director (CMD) of the Punjab National Bank (PNB) in April.

A mechanical engineer from the Benares Hindu University, Mr Kohli is also Chairman of the Indian Banks' Association (IBA) and the acting Chairman and Managing Director of the Small Industries Development Bank of India (SIDBI). In a candid interview with Business Line, Mr Kohli discussed the various issues affecting the banking industry.

Excerpts from the interview:

A new phase of reforms is underway in public sector banks. Where do you see the industry in the years to come vis-a-vis other players?

Banks will have to follow a pro-active approach, with a focussed thrust on achieving higher levels of efficiency and productivity to face stiff competition from the private sector, foreign banks and FIs. Mergers and acquisitions would be the order of the day.

I foresee banks as the forerunners in the country's investment. An enhanced international presence would lead banks to compete globally.

What are the urgent issues that need to be addressed to increase the efficiency and profitability of public sector banks?

There are five basic issues that banks have to grapple with. These are the adoption of advanced technology, the reduction of operating expenditure, increase in fee-based income, reallocations, consolidation of branch network and manpower rationalisation.

Manpower planning has been a major issue confronting the banking industry. Do you think that the VRS would lead to improved productivity, or do the banks need to do more than just improve their employees' performances. What is the present status of the VRS in the Punjab National Bank (PNB)?

Manpower planning is a wide and vital subject, and should be examined with regard to the vast network and multi-cultural nature of PSBs. There are several factors that contribute to the efficiency of manpower. These include training, placement, career paths and succession planning.

VRS is not the only method to improve productivity. It is one measure to right-size banks and may increase productivity. Besides the VRS, it is necessary to augment HRD activities, including job rotation, changes in the performance appraisal system and provide incentives that would improve the motivation of bank employees. In the PNB, the VRS is open from November 1-30, and action on the VRS requests will be taken thereafter.

Overall, more emphasis has to be placed on training. We have 10 training centres, a Regional Staff College at Panchukula and an apex college at Delhi. Two more regional training centres are coming up at Thane in Mumbai, and in Lucknow, Uttar Pradesh. They will bolster the bank's existing training capacity. The annual expenditure on training is about Rs 10 crore. Measures such as performance appraisals, career-path and succession planning and the introduction of non-monetary incentives to the staff are being initiated to augment HRD activities.

Mergers and acquisitions seem to have become a global phenomenon. It has also become evident among private banks in India. Do you see a trend towards consolidation in the Indian public sector banks too?

Acquisitions and mergers in the banking industry look to be a reality in the next few years. The objective of banks is profits and survival. These can be achieved only through the synergies of merger and acquisitions since these result in cost-effectiveness and increased productivity.

Recently, there was a huge inflow of dollar funds through the SBI's India Millennium Deposit (IMD) Scheme. What would be the impact of the increased liquidity on the interest rates?

The IMD Scheme should have its own impact on inflation, monetisation, currency pressures, and consequently on interest rates, since the funds would infuse liquidity in the system. However, we do not see much change in the interest rates since the RBI would play a major role in controlling excessive liquidity by conducting aggressive auctions and open market operations and ensure the gradual release of funds in to the system so that there is no undue volatility.

The corporate sector has always been asking for cheaper funds from the lenders. Do you see the interest rates softening in the near-term?

With the prevailing level of fiscal deficit and the massive Government borrowing programme, it is difficult to envisage the further softening of interest rates in the near-term despite the surplus liquidity available within the banks, low C-D (credit-deposit) ratio and funds flow from the IMD. However, good corporates will continue to enjoy the benefits of cheaper funds as the bank would vie with each other to bring these funds into their fold depending on their credit rating.

NPAs are an area of continuing concern for the banking industry. There seems to be no end to the problem. How difficult is the problem and is there any solution?

Managing the NPA is a two-fold problem -- to contain fresh slippage and the recovery in existing NPAs. Efforts are afoot to contain fresh NPAs by evolving a system of preventive monitoring and continuous review of weak accounts at all levels, including that of executive directors and CMDs.

In the PNB, we are trying to take advantage of the one-time settlement scheme announced by the Reserve Bank of India. We have already formulated an action plan with respect to all NPA accounts of more than Rs 5 crore in line with the directives of the Finance Ministry. These initiatives are being put into action in a definite time-frame.

Banks are also eagerly looking forward to the recommendations of the high-powered Panel on Foreclosure and Asset Recovery (Andhyarijuna Committee Recommendations), which is contemplating bestowing special powers of seizure and sale on the banks and other measures to expedite the loan recovery process. The formation of National Tribunals as envisaged in the Justice Eradi Committee recommendations would also aid the expeditious disposal of cases.

What has been recent trend in credit offtake? Do you foresee a reversal in the economic slowdown witnessed in recent months? What role does the banking industry play in arresting this trend?

Credit offtake is likely to improve in the second half with the onset of the busy season and in line with the past trends. The Government's recently announced measure to remove caps on investments and shareholdings of FIIs and incentives for infrastructure will set off a chain reaction that will encourage credit offtake. Also, the Government's recent steps to regulate the capital market will encourage industrial growth and, in turn, credit expansion.

The Government has announced plans to reduce its equity holdings in these banks to 33 per cent. What benefits are likely to accrue to the banks from this move?

The Government's move to reduce its equity stake is a positive step towards better corporate governance. The worldover, it has been recognised that market discipline leads to better corporate governance. The Basle Core Group on government-owned banks has noted that conflicts of interest for the State as owner are difficult, if not impossible, to avoid should the State act as owner, regulator, depositor, largest borrower, monetary and tax authority. The Core Group has also pointed out that market discipline lends itself better to good governance compared to state ownership.

There is no doubt that better corporate governance and market discipline would result in better quality and speed in decision-making. For strong banks such as the PNB, reduced state ownership and increased market discipline should result in increased transparency, better decision-making and better valuations in the market.