Banks must be allowed to issue infrastructure bonds: YES Bank chief

With the Union Budget and the RBI's mid-term credit policy just around the corner, Business Line interacted with Dr Rana Kapoor, Founder, Managing Director and CEO, YES Bank, to get clarity on various issues affecting the bank and also to know of his expectations from the Budget.

How is YES Bank coping with the prevailing tight liquidity conditions?

At an overall market level, there is definitely liquidity tightness. While liquidity is available, it is coming at a higher price. For YES Bank specifically, there isn't any liquidity stress, as we are able to tap adequate deposits. Our savings and current account balances, especially from retail, are rising quite rapidly.

So we're not excessively dependent either on wholesale deposits or on the inter-bank call market. But due to liquidity mismatches in the market, the overall cost of fund structure has definitely escalated over the last couple of months.

How have the savings bank balances grown post-deregulation? Is the momentum sustaining after the initial surge?

We got a big fillip in savings account in less than two months of de-regulation. As we are a listed bank we cannot share the balances numbers for the first two months of this quarter.

All I can say is that the trend is getting even firmer because this is a significant impact of de-regulation.

We are witnessing greater penetration in corporate salary accounts, and other savings accounts, especially in key metro and urban areas. Now we are cascading this to semi-urban and rural markets as well. So most certainly, savings accounts are experiencing highly satisfactory growth. We are also seeing a shift from short-term deposits of 30 days to 9 months indicating accretion towards savings balances due to instant liquidity and transactional convenience.

In the December quarter, in about two months post-deregulation, our savings account balances grew by 40 per cent from Rs 725 crore to Rs 1,200 crore.

Larger banks are yet to de-regulate their savings bank rate. Are we seeing any shift from these accounts to YES Bank?

The savings bank account segment is extremely large at over Rs 9,50,000 crore, so much so that even one per cent erosion of these deposits from the top banks amount to over Rs 40,000 crore. So we want to pursue that 1 per cent potential target as that in itself will be a very large achievement for YES Bank.

If we can get 30-40 per cent of that, it can be a sizeable number of almost Rs 12,000 crore or so. Our target is to garner around Rs 7,500-10,000 crore of savings bank deposits by September. By that time, CASA should account for 17-18 per cent of our total deposits.

When do you expect interest rates to decline?

In our assessment, we are very much at the peak of the interest rate monetary cycle. The rates may start declining no later than at the Annual Credit Policy in mid-April if not sooner, accompanied by further monetary relaxations through CRR, OMO actions. The bugbear of inflation which has been posing challenges and impacting the growth cycle is substantially under control now. I believe the challenge in the new fiscal year is going to be to restore economic growth. We need to ensure that the high employability of the almost two crore people coming into the employment market every year, is not severely impacted. We also expect some fiscal consolidation in the Budget, with a clear road map to reduce the fiscal deficit, for monetary policy to start easing.

When do you expect the investment cycle to revive?

The investment rate has fallen particularly over the last three years from almost 34-35 per cent to 30 per cent levels as reflected in the recent Economic Advisory Council updates. Savings rate during this period fell from 36 per cent to less than 32 per cent. So one thing which is very evident is that, investment and capital formation have slowed down, particularly aggravating in 2011-2012 to date.

With lower interest rates, availability of liquidity globally due to quantitative easing and softening inflation, market and business confidence should start restoring soon.

This means, project finance, capital budgeting decisions which have slowed down, should start picking up momentum from April onwards. I believe, the other big trigger is going to be the economic signals in the Budget. Especially in terms of driving the infrastructure investments and also providing further impetus to capital formation in other key sectors, including long-pending FDI liberalisation and key reforms.

What are your budget expectations?

We have made recommendations to the Finance Ministry as well as the IBA directly, that banks should be permitted to issue infrastructure bonds as we have effective risk management systems and a robust ALM experience.

Infra bonds will help galvanise very important sources of medium to long-term savings to contribute towards infrastructure development in the country. Banks can get a lot more retail participation as we have an established retail distribution outreach relative to NBFCs.

The other important thing which the Budget can do is to allow Indian banks to issue foreign currency paper which is exempt from withholding tax. Around $4-5 billion can easily be raised by banks in the long-term bond markets. This will reduce the cost of funds in the banking system, and is also important for the current account deficit management. This route is available for Indian banks with overseas branches, but regrettably not available to Indian banks in India.

I am deeply convinced that gradual monetary reversals, followed by accelerated disinvestments, are two important interventions that are almost around the corner. The top 17 PSU companies are sitting on Rs 1,70,000 crore of surpluses. This is a critical aspect, if these are invested in capital formation, it will not create any budgetary pressures for investment expenditure as a lot of investments can come from Central and state PSUs which are sitting on these cash balances.

How do you see the road ahead for the bank?

We are pursuing version 2.0 at YES Bank which is distinctly about three years away and we have set ourselves qualitative objectives to emerge as a professional bank, uncompromising on quality of the service and customer experience.

At the same time, we are making significant investments in infrastructure to get to 750 branches. We are at present about 330 and are to install above 2,500-3,000 ATMs. We plan to increase our employee base to 12,000 from 5,100 at present. These are significant investments. The rank one investment at YES Bank is in people, followed by branch network and then of course creative and innovative technology, that is, to help improve the service experience for our valued customers.

What are your views on new bank licenses?

New bank licenses at present are a bone of contention. It is not an opportune time to add new systemic risk in Indian banking other than maybe AAA rate NBFCs converting to banks. I believe the lowest risk new bank licensing strategy would be to see one or two seasoned, long vintage AAA rated NBFCs with a good and proven inclusive banking model to convert from NBFCs to banks.

This would be the line of least resistance and possibly the lowest risk strategy in terms of managing new systemic risk at a time when risks are relatively high, both from an exogenous global standpoint as well as on the domestic front. We need a highly favourable economic environment as much as stability for new hubs to emerge.

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