Jaideep Iyer, President, Financial Management and Deputy CFO of YES Bank, dealt with a range of issues pertaining to the banking industry as well as his bank in a telephonic chat with Business Line . Excerpts from the telechat:

What strategy did YES Bank adopt to combat the ongoing liquidity pressures?

We have been conscious about sticking to our pricing. Deposits are available to us and the situation is not so bad. Liquidity is there in the system, just that it is available through the RBI window. Government balances with the RBI continues to be high. And this would mean that the RBI has no choice but to bring it back into the system either through ‘Open Market Operations' or through the Repo window. So what would have normally been deposits is at least coming in the short-term from the repo window.

I have seen enough continued traction in our deposit franchise. That is not the problem. The problem is the sharp up-movement in rates, which depending on each bank's profile of the customers, they'll see how they can pass on those increased costs to customers on the asset side.

So what we consciously do is to have a fairly matched profile for our asset-liability management. Basically, our liability profile is about 19 months and our loan profile is about 16 months. While we have relatively low CASA, we have negligible long-term fixed rate loans. Around 95 per cent of our loan book is either floating, or if it is fixed rate, it is less than one-year of maturity.

What this means is, over a period, 95 per cent of our loans will get re-priced. Over one and a half two years, 90 per cent of our deposit will go up. If bank has higher CASA, they typically do more of fixed rate loans especially in retail, for example, auto loans, personal loans, credit card loans are fixed rate. Even home loans are stickier to go up, unlike corporate loans which move fairly quickly.

If you look at our margins over margins during 2005-2008 when rates went up from 4-5 per cent levels to 10-11 per cent, margins were in a range of 2.7-2.9 per cent over a three year period. It is important to look at both sides of the book not only deposits rates.

Aren't banks running out of exposure limits on infrastructure sector?

Yes, I think individual and group exposure limits that are hitting banks. The regulator has expressed some concerns generally in public comments on the ALM mismatches because of funding infrastructure projects. So it is going to be tougher.

Therefore , there have been budgetary proposals being discussed at least by the banks with the Finance Minister to allow banks to issue infra bonds.

Has YES Bank benefited from exposure problems that PSBs are having?

We have benefitted significantly in calendar 2010, not exactly from exposure itself but it was a combination of fact that large foreign banks actually disappeared in terms of risk appetite.

We got a great opportunity to grow in the large corporate space in which we always wanted to build a franchise. I think the second half of CY09 and first half of CY10, has been probably the best period in terms of origination quality and relationship breakthrough as compared to the preceding three years.

There was a lot of respect also that the customers saw for us, having dealt with credit crisis quite well. We were having risk appetite when others were sinking and saying no to business. I think that helped a lot.

Generally, we have seen larger groups wanting to diversify their banking relationships which have also helped. This was partly driven by the fact that PSU banks are reaching their internal risk limits in terms of larger corporates.

Tell us about YES Bank's Version 2.0?

Basically, what we are looking at is that we should have a Rs 1.5 lakh crore balance sheet by March 2015. We would like to have about Rs 1.25 lakh deposits and Rs 1 lakh crore of loans. That would roughly mirror what Axis Bank was in 2009 which was 15 years after they started. In our case, it will be 11 years after we started.

We plan to scale up our branch network to 750, ATM network to 3,000 and employees to 12,000 +. Our return on asset is expected to be maintained in the range of 1.4-1.6 per cent while ROEs in excess of 20 per cent. In terms of strategy and granularity, it is basically the liabilities driving the growth.

It, therefore, means more CASA, retail deposits. On the asset side, more retail, more SME, more mid-corporates. Today, our loans comprise 70 per cent large corporates, 20 per cent commercial banking clients and 10 per cent SME. We want to be more like 40:30:30 split. We want the 10 per cent CASA to move to 25-30 per cent. We are at 15 per cent levels in terms of branch banking contribution to deposits. We want this to go up to 30- 35 per cent. This should give us about 60 per cent of CASA plus branch banking which is where the industry is today. We are adopting a B to B to C business model.

One is, of course, more distribution strength and, therefore, more clients and customers which is a linear way to go. We are supplementing this strategy with more corporate alliances and tie-ups which translate into multiple originations at the ground. A simple example is, tying up with brokerage houses for offering a 3-in-1 account.

It gives the brokerage house an incentive to sell savings account of YES Bank to the customer. Because that way he will give something value added - otherwise, he is competing with HDFC and ICICI which offer a 3-in-1. For us what it does is, it gives us a filtered access to brokerage client.

Similarly, we have tied up with Bajaj Allianz because of which we get access to 40 million customers. On the asset side, we are in talks with housing finance company to partner on originating low-value housing loan which will take care of priority lending sector requirement. Similarly we are also in talks with another NBFC to originate small value transactions in retail assets.

We necessarily don't have to have the best retail asset strength to be honest. We will leverage on these partnership models where we give away something to the table to the partners. The NBFC benefits by earning fee income without putting a balance sheet. It is a win-win situation. In a nutshell, B-B-C relationship model translates into multiple originations for smaller businesses.

Are there any plans to become a financial conglomerate like ICICI?

In my opinion, the new order of banking would be plain banking. We actually are not in the camp of doing multiple things under the banking umbrella. Global and local regulations will clearly force entities to become pure banks. That is the cleanest structure.

The only thing we want to do on our own is broking especially on the retail side. We are not keen on insurance and AMC. It is too much of distraction; it is too much of a reputation risk. That is how regulators are going to view it going forward.

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