Looking at financial inclusion as an opportunity, not an obligation

Credit growth might be expected to slow down this year, but there is plenty of opportunity in the warehousing, logistics and agro-based infrastructure sectors to step-up credit, feels Mr Nagesh Pydah, Chairman and Managing Director, Oriental Bank of Commerce. Speaking to Business Line, he also explained how service, and not products, will be the key differentiator when fresh banking licences are issued .

Excerpts from the interview:

How long is the RBI expected to continue with rate hikes?

Taming inflation has been on the radar of the RBI. The apex bank doesn't mind sacrificing growth as long as inflation can be controlled. For a country like India, which is on the growth path, 6-6.5 per cent would be a reasonable figure.

But from a global perspective, I think our inflation is reasonably under control. However, the fact remains that (with rate hikes) debt will become costlier and that will affect the asset quality of banks.

It is all a ripple effect. But it would not dent asset quality as significantly as it is made out to be. In spite of the interest rates ruling now, the advance tax payments were quite buoyant. So this cannot be the only reason for an account getting delinquent. Industries which have margin pressures may have a bit of a problem. But, by and large, the economy seems to be quite buoyant.

What is your growth outlook for the banking industry?

Last year, credit growth was at 26-41 per cent, and deposits grew at 28-35 per cent. This year, credit growth is expected to be 22-24 per cent. And deposits may grow at 19-20 per cent.

The fact remains that the RBI's stance will be hawkish for some time. It is said that inflation is expected to come down post October. But we don't know what will happen, especially when we look at the global economy. Greece may be a pivot. The future of the euro itself is becoming shaky. Even in the US, things are not hunky dory. Consumer spending has not shot up the way it was expected to.

How are net interest margins (NIMs) expected to be this year?

There is a lot of noise about NIMs being high in the banking industry. But the Indian banking is totally different. We don't have as much fee-based income as money center banks abroad. To make a comparison and say that our NIMs are very high is not fair.

Investment banking is not so much of an avenue for revenue in the Indian banking set-up. Yes, some of the banks have their own capital market subsidiaries, but they are not as much as those of banks abroad. As long as NIM is at about three, it is good enough. Some banks, including ours, took a dip in NIM in the fourth quarter. This year, in the first quarter, I expect banks to face margin pressures.

What are the other avenues outside of infrastructure for credit growth?

Certain sectors such as textiles have shown good off-take. There is also lot of appetite in the logistics sector. Warehousing is another area where there is tremendous opportunity. We are also quite bullish on that.

The way forward is to look at agro-based infrastructure as an avenue for stepping up credit. That is where we public sector bankers are strong in terms of reach as well, because we have a huge rural network.

Our bank has about 700 branches in semi-urban and rural areas and, as a conscious policy, we are looking to step up our agriculture and agro-based industries' off-take, give importance to contract farming and tie up arrangements. These present a lot of opportunity.

Financial inclusion (FI) is another area which we have looked at, not as an obligation but an opportunity. Today, a lot of the informal economy is cash-based . If a customer has some money with him, he indulges in socially inequitable expenditure.

With FI, he will perhaps end up saving the money with the bank. We have to work towards setting up facilities around the village infrastructure so that we not only take care of agriculture but also the agro-processing and allied industries.

Then, there will be more opportunity and people need not migrate to towns and metros in search of jobs. The future lies in creating infrastructure revolving around agriculture, agri supply-chain and logistics. Ultimately, banks should act as a catalyst for growth in any country.

What steps are you taking to improve your CASA?

Our CASA, at around 24.5 per cent, is a big challenge no doubt. But, as I said, the financial inclusion mandate of the Government presents an opportunity to work on this. Our experience with FI customers shows that the average savings bank deposit may be Rs 1,500. But I have visited so many FI villages where there is even a Reebok showroom. This only goes to show that the disposable income of the farmer today has gone up substantially. It is a question of whether this disposable income is brought into the banking system.

What will be the scenario in terms of competition, quality, and product innovations when fresh banking licences are issued?

Giving fresh banking licences is always welcome. When you have competition, customer is the king. Ultimately, retaining a customer depends on how you catch his attention. Products may be the same. Depending on what your assessment of a customer is, you will reach out in a particular manner.

Ultimately, the customer looks at what product a customer offers, which is to his convenience. Every bank need not give everything. Let us understand that banking is a service industry. And in a business which is largely determined by accepting deposits and lending money, service is only going to be the differentiator.

Are Indian banks ready for Basel III in terms of risk management standards?

Despite sophisticated systems, you saw so many money center banks fail. In spite of risk management, has there not been any slippages/NPAs? It is alright to pick out a database and subject it to intensive analysis. But by doing such analysis, sometimes you end up getting paralysed into indecision.

What has happened is, with an emphasis on number crunching, we have forgotten the basic art of instinctive banking.

Banking is an art — of listening to your gut instinct when evaluating a person. Today everything is technology driven but technology doesn't think for you. It can interpret. It can give you some analytics. Nothing beyond that. It need not be the only basis on which you formulate your decision.

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