The Hindu Business Line : ‘Profitability likely to remain stable due to reduced exposure to risks’

Chennai, Jan. 13 Mr M.V. Nair, Chairman and Managing Director, Union Bank of India, says the year 2009-10 will be a more challenging year for the banking industry as the impact of the slowdown will only be seen from the fourth quarter of 2008-09. A change process ‘Project Nav Nirman’ has been introduced at the bank for transforming the bank into a customer-centric marketing organisation by leveraging technology, redefining business strategies and re-engineering the business processes, Mr Nair told Business Line in an interview. Excerpts:

Will there be a dip in the bank’s profitability for the current financial year due to the economic slowdown?

We do not see a dip in profitability for the current financial year as the first six months have been reasonably good for the banking industry; credit is growing by 24 per cent and deposits by 21 per cent. For Union Bank, deposits have grown by 30 per cent and we have reduced the exposure of high cost deposits from 21 per cent, starting 2008-09, to 14 per cent currently.

If you look at the current scenario, growth has been downsized at 7 per cent from 9 per cent; the slowdown is already impacting industries such as commercial vehicles, auto, textile, steel and commodities.

It is also seen that there is modest growth and when we look at agriculture and the rural economy, demand is robust; when we talk to big retailers they say that the demand for basic needs continues (and that) only discretionary expenditure is being postponed.

The losses from treasury during the first quarter have been compensated by gains during the third quarter. Exports will have a major impact due the global meltdown, but Union Bank has only about 10 per cent export exposure of its advances.

What do you think will be the margins going forward?

Net interest margin was 2.8 per cent for the first six months. Though we had 3.01 per cent margin in the second quarter, we expect to maintain it at 3 per cent during the third quarter.

However, we see margin shrinking in the fourth quarter. We have targeted 2.8 per cent margin for this fiscal so the margins will be in the range we had foreseen. Our current account to saving account ratio (CASA) has improved to 34.5 per cent as on September 30, 2008. Moving forward CASA may not be good with interest rates coming down.

Do you see pressure on asset quality increasing with the slowdown?

The impact of the slowdown can be seen only from the fourth quarter. The bank’s exposure to small and medium enterprises is about 16 per cent (Rs 14,000 crore).

SMEs are hugely vulnerable when there is an economic downturn as they depend more on large companies. When demand slows down, large corporates delay payment to SMEs. We have set up a team to concentrate on 10 centres such as Surat, Tirupur and Jamshedpur, to monitor and help these small enterprises restructure loans. As the process is still on, the quantum of such loans restructured would be known by end of this month.

With RBI’s recent guidelines introduced for provisioning of standard assets due to the prevailing scenario, will you reduce provisioning for non-performing assets?

Our intention is not to reduce provisioning for NPAs, but to maintain a high-level provisioning cover. So far there has not been a rise in NPA, but the real test would be during this quarter — to see if there are any substantial increase in NPAs. We have a robust monitoring system to identify strained assets; when there is a chance of an overdue and possibility of slippage we take note of it and take necessary steps.

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‘Profitability likely to remain stable due to reduced exposure to risks’