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Suresh Krishnamurthy

Union Bank of India is one of the mid-sized public sector banks which manages about Rs 65,000 crore. Its stock has appreciated more than 100 per cent since its listing in 2002. The bank has been making progress in terms of boosting low-cost deposits, relatively superior advances growth and in tackling bad loans. Business Line spoke to Mr V. Leeladhar, its Chairman and Managing Director.

Excerpts from the interview:

Where are the lending rates headed?

We have a feeling that rates have bottomed out. They may not go down further. Housing loans have broken the 8 per cent barrier. I do not see scope for further decline for another six-12 months. Banks cannot afford to bring the rates down further unless they dramatically reduce the cost of transactions through substantial computerisation. That will take some time.

What is the likely impact on interest rates if double-digit money supply growth continues?

It all depends on economic recovery. We have not seen any greenfield projects coming up during the last three years. Other than some road projects here and there nothing much has happened Housing loan is the saviour now.

Is working capital offtake not enough to prop up credit growth?

That can also happen. But we are not seeing even that. Corporates are not utilising working capital limits that we have sanctioned. Mere increase in production is not necessarily leading to an increase in availment of credit. Corporates are getting funds at lower rates through instruments such as commercial paper.

What is the kind of surplus that you are saddled with and which you are investing in short-term instruments such as CPs between balance-sheet dates?

In my bank's case, the amount invested in the CPs and short-term debt would be Rs 600-Rs 750 crore. Amount invested in sub-PLR loans would be around Rs 2,500 crore. Cumulatively, about Rs 3,000 crore. We have been restricting the surpluses to that level by not going in for bulk deposits. The cumulative liquidity in the system could easily be about Rs 50,000 crore.

What has been the trend regarding your cost of funds since March 2003?

If you look at the incremental cost of funds, it is 4.5-4.6 per cent. So, the cost of funds can come down to this level from 6.1 per cent at the end of March 2003.

Will that not lead to an expansion in your net interest margins?

Yes, maybe by 0.3-0.5 percentage points.

Is Union Bank of India different from others in this respect?

No, that will be the case with others too. We consult one another.

But all the other banks say that they will be happy to maintain to net interest margins?

I would say that banks which are not aggressively trying to increase the balance-sheet size will see a marginal increase in net interest margins.

Is growth in low-cost deposits emerging as the differentiating factor among banks?

Low-cost deposits really make a difference. Look at Punjab National Bank. That is the bank which has got maximum SB accounts — about 36 per cent. Union Bank has 26 per cent. It makes a huge difference. Last year, we increased the proportion by one percentage point. This year we are targeting an increase of 2 percentage points in the proportion of savings account deposits. Current accounts are virtually dying out. Companies have become savvy in dealing with funds. They are one step ahead of our dealers.

With money supply growth at 11 per cent, growth beyond that in savings deposits may involve capturing market share...

If you look at my bank, our saving account balances are going up steeply in Uttar Pradesh. In UP, there are large number of places where we are the only bank. People in those areas remit the money in the savings accounts. Factors such as interest elasticity do not operate in such places and money stays in the savings account. Every district reports increase of savings accounts of Rs 100 crore over one year. So, these are fresh deposit creation, and we need not capture market others' share.

In metros, we may be losing customers to private banks. But we are also gearing up. We are also coming up with technology that is comparable to private banks.

Where do you see advances growth coming from?

It is only housing loans now. Only 200 of our branches provide housing loans now. As penetration improves, as the number of branches increase there is scope for large growth in housing loans.

What are the targets for 2003-04?

We are looking at 16 per cent credit growth and 12 per cent deposit growth for the year. In the April-June quarter, we have achieved that.

Has competition intensified in the non-fund incomes segment? Where do you see scope for boosting fee-based incomes?

In the case of bulk guarantees and bulk LCs, the competition has become intense. Some of the rates which we get do not even cover the costs of our capital adequacy. Now, off-balance-sheet items are also considered for capital adequacy calculation. We need to go more and more for other services such as insurance selling, which is likely to boost the fee-based income. The latter is now about 13 per cent of our incomes. We are looking at a target of 16 per cent at the end of this year.

You have talked earlier about covering your operating expenses with non-fund incomes...

Non-fund income is now about 60 per cent of our operating expenses. We are looking for 100 per cent coverage in a year or two. There are banks such as Corporation Bank which have already more or less done that. We were at 40 per cent two years back.

With respect to dividend payouts, why is it low for public sector banks? ICICI Bank has declared a pay out of 50 per cent, but the pay out for many public sector banks is 8-20 per cent?

I think it is the inclination to improve the capital adequacy ratio. The RBI does not interfere in thisAlso, once you declare a very high dividend and you are not able to maintain it next year, it could affect shareholder value.

In 2002-03, our pay out was about 19 per cent of our disposable income.

How does the return of capital to the Government make sense if you will need more capital?

We are returning dead capital and replacing it with fresh capital with cash infusion from the market.

We cannot return capital until September this year. Our calculations show that after September we can return about Rs 100 crore of capital to the Government.

However, we will return capital only if it is accepted in the same way as it has been accepted so far.

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