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`Lending rates will come down further' — Mr M. S. Kapur, Chairman and Managing Director, Vijaya Bank

N. S. Vageesh
Suresh Krishnamurthy

Vijaya Bank is one of the smallest public sector banks in the country. Yet, the bank has attracted investor attention with rapid business and profit growth in recent years. Business Line spoke to Mr M. S. Kapur, the bank's Chairman and Managing Director, on the factors driving growth and his outlook on growth prospects.

Excerpts from the interview:

What is driving the larger rate of growth in advances recorded by Vijaya Bank? What is the likely growth for 2003-04 and what is the likely target for 2004-05?

Our focus in retail lending, especially in housing loan segment, remains a key driver for the bank's larger credit growth. Responding to the emerging needs of the Indian households, we took certain pioneering and bold steps to bring out borrower-friendly schemes. At the same time, we have not forgotten our traditional orientation towards trade and industry and formulated liberal lending schemes for traders, property owners and other retail segments.

Our thrust in these areas has helped us to improve the share of our retail advances in total credit from 23 per cent as of March 31, 2003 to 33 per cent as on December 31, 2003. We recorded an annualised credit growth of over 35 per cent on the nine months of the current fiscal to reach a total credit portfolio of Rs 10,344 crore as on December 31, 2003. We hope to sustain the tempo and aim at a credit portfolio of Rs 12,000 crore by March 31 and further improve it to Rs16,000 crore by 2004-05.

Your cost of funds was about 5.93 per cent at the end of December 2003. What is the incremental cost of funds now? Are you succeeding in increasing the proportion of savings deposits?

Our cost of funds at the end of December 2003 was around 5.21 per cent it and is declining due to the re-pricing of maturing liabilities as well as our efforts at enlarging our base of low-cost deposits and float funds. During the year we conducted successful campaigns to mobilise current and savings deposits. The annualised growth in savings deposits this year is over 20 per cent and we have added about two lakh SB accounts through intense campaigning. The share of savings deposits in our aggregate deposits has increased from 20.85 per cent in March 2003 approximately 22 per cent now.

Do you believe that interest rates in India have bottomed out or there is further scope for bringing down the rates. If so why?

Globally and internationally interest rates are softening and our country is no exception. Despite the drop in interest rates, our lending rates still continue to remain much higher than the rates at which funds can be accessed internationally. There are claims of interest rates bottoming out whenever a reduction of, say, 25 basis points is effected in the PLR or the Bank Rate or the repo rates. I do not believe in such claims in the context of continuing slide elsewhere as well as the disparity that exists between interest rates worldwide and in our country. In my opinion, there exists scope for bringing down the lending rates further, and sooner or later this is bound to happen.

What is the interest spread now? Where do you see the spreads moving? (You had talked about spreads going down to 3 per cent). Why are the spreads headed down?

Our average interest spread improved from 3.22 per cent to 3.70 per cent during 2002-03, and as of December 2003 we have been able to maintain this. However, the liquidity in the financial system and the competition among banks continue to fuel southward movement of lending rates. The tendency is that even the existing assets are getting re-priced at lower rates on the face of takeover threats. I believe that banks will find it difficult to sustain interest spreads in excess of 3 per cent and will eventually be looking towards a highly competitive spread of around 3 per cent.

There is talk of NPAs emerging from housing finance. What is your experience?

The NPAs under housing finance account for less than 1 per cent of our outstanding housing loans and, in fact, we have consistently been improving our status in this area. The talk of NPAs emerging from housing finance is borne out of the fear of lending against overvalued assets in a speculative market without any or negligible margin. We have put in place adequate checks and controls, and our appraisal and evaluation techniques are strong enough to keep away fears of any escalating NPAs in housing sector.

You have been able to reduce your gross non-performing assets by about Rs 90 crore in the first nine months. Can you give us the relevant statistics?

We have made total cash recovery of Rs 74.65 crore against NPA balances and upgraded Rs 20 crore till December 2003. Total reduction in NPAs amounted to Rs 255 crore till December 2003. We aim to bring down the outstanding NPA level to Rs 350 crore as at the end of March 2004 as against Rs 505 crore as on March 2003.

Your capital adequacy is quite high at above 14 per cent? Do you think advance growth alone is sufficient to utilise this capital?

Our credit growth is much larger than the industry average. We have a strong focus in retail lending and also look to increasing our commission income from non-fund business which carry capital charge. Our medium-term vision is to attain a business size of Rs 40,000 crore by March 2005 and further improve our retail asset base, and this requires capital. Our capital adequacy ratio is a matter of comfort for us to plan and achieve our growth objectives. I may also mention that our follow-on public offer of Rs 240 crore in the third quarter contributed significantly to our high capital adequacy ratio as of December 2003.

Mergers and acquisitions do facilitate rapid growth, but I can comment on this only when we have something concrete. In my opinion, the banking sector will move towards more and more mergers and acquisitions only after government stake in public sector banks is reduced to 33 per cent.

What is the contribution of profit from sale of government securities to your gross profit? What is the yield on investments now?

Our income from treasury operations during 2002-03 was just about 52 per cent of our gross profit. In the nine months ended December 2003, our treasury income at Rs 298 crore was higher by Rs 73 crore over the previous year. However, as a percentage to the gross profit it was lower at 45 per cent indicating the growing share of our interest earnings in our overall profits. I am confident that our lending strategies and efforts at increasing non-interest income will compensate for any decline in treasury earnings.

Vijaya Bank had started selling insurance and mutual fund products? What is progress has been made till now in terms of premiums collected and what is the income earned?

We have taken up selling non-life insurance products of National Insurance Co Ltd to our customers as well as others initially under a referral arrangement, and I have the satisfaction of seeing this business grow in volumes in recent months. We have collected premia of over Rs 5.17 crore till December 2003 which has resulted in agency commission of over Rs 40 lakh. More and more of our staff are getting qualified to do agency business and I see this business growing rapidly in coming months.

The distribution of mutual funds was taken up only in January, and we had a very impressive inaugural collection of over Rs 90 crore. I have a lot of hope that both businesses will grow into formidable earning opportunities for the bank.

Are there any plans for external commercial borrowings (ECBs)? What is the expected pricing and what is the tenor of the ECBs? What is the purpose?

The bank will take a decision on this matter at the appropriate time.

Have you finalised your plans for overseas listing? If that were to happen in 2004-05 then will it also not add to your capital adequacy? Will such capital raising plans be linked to acquisitions?

At this point I can only say that we have reconciled our accounts to US GAAP requirements. As for the US listing we shall talk about it if and when we decide to do so. If that happens and provided further that the government shareholding gets reduced to 33 per cent enabling us to mobilise further capital, there will be a contingent possibility of the same adding up to our capital adequacy. We shall review our growth plans and business strategies to optimise the use of capital at our disposal when the occasion arises.

What is the size of your equity portfolio? Are you sitting on large profits on your equity portfolio too?

We are conscious of the risks involved in taking large exposures under equity and currently have a modest portfolio of about Rs110 crore. We do respond to the opportunities available in this segment and plan to expand the portfolio with caution. At the same time we are also into strengthening our treasury and trading set-up through recruitment of qualified personnel and our state-of-the-art integrated treasury at Bangalore which is ready for formal inauguration.

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