Money & Banking

‘Funding of long-term infrastructure loans will offer banks greater flexibility’

R Ravikumar Chennai | Updated on March 12, 2018


While the Budget proposals allow banks to issue long-term infra bonds without reserve requirements, this is applicable only for incremental sources; thus, it will take a while for banks to see any reasonable reduction in cost of funds, says M. Narendra, Chairman and Managing Director of Indian Overseas Bank.

However, the proposed funding of long-term infrastructure loans will offer banks greater flexibility, he said in an interview to Business Line. Excerpts:

The Budget has allowed banks to issue long-term infrastructure bonds exempt from statutory reserve provisions. Your thoughts on these measures?

The long-term financing for infrastructure has been a major constraint in encouraging larger private sector participation.

The proposed relaxation of regulatory requirements such as CRR/SLR may lead to some reduction in our cost of funds. But, as this is applicable only for incremental sources through bonds, reduction in cost of funds may not happen instantly.

Long-term infrastructure loans will create more flexibility.

When there is a provision of refinance available, we can realistically fix the repayment period.

The Finance Minister has said bank consolidation will happen in a time-bound manner? What could be the likely impact?

As Indian banks at present are unable to compete globally in terms of fund mobilisation, credit disbursal, investment and financial services, the proposed consolidation will increase cost and operational efficiency.

However constraints such as alignment of technology, assimilation of systems and processes, customer dissatisfaction and the lack of a level-playing field, need to be sorted out before imple- mentation.

Do you see interest rates falling in the months to come?

Last year, in the interest of economic revival, no nationalised bank increased the base rate despite the tight liquidity. However, banks had to increase the rates on term deposits for the public competitively and in line with market trends. This has become a constraint on interest spread. With the new Government initiating favourable measures, we expect the economy to rebound quickly with regulators looking at softening key policy rates. Once the domestic savings rate starts improving, the base rate will likely moderate; this will stimulate credit growth.

Coming to IOB, the bank was faced with NPA issues for the last few quarters which have hit the bottomline…

With the economic slowdown, the bad debts of all public sector banks have surged to nine-year high. Gross NPAs, as a ratio of gross advances, touched 4.4 per cent by March 2014, compared with 3.84 per cent in 2012-13. Of course, IOB also faced such serious constraints in the past two years. However, on the net profit front, the bank ranked second among the 19 nationalised banks, with profit growth of 6.08 per cent against an average negative growth of 16.47 per cent across 19 banks.

IOB made significant cash recoveries and upgraded NPA accounts in 2013-14. Aggregate cash recovery in 2013-14 was ₹1,527.96 crore, while upgradation of NPAs aggregated to ₹994 crore. The bank has set up a Specialised Asset Recovery Management Branch to improve recovery.

To ensure further reduction of NPAs, the bank has taken steps to intensify monitoring of high-value slippage accounts of ₹5 crore and above , and regular follow-up of NPA accounts of ₹1 crore and above, besides frequent Lok Adalats, recovery camps, one-time settlements and initiating legal action under the Sarfaesi Act in all eligible accounts. Besides, IOB has also sold NPAs worth ₹983 crore to asset reconstruction companies.

The bank raised capital from the Centre and LIC? What are the plans for medium-term notes?

As of March 2014, IOB’s capital adequacy ratio is favourable, at 10.78 per cent as per Basel III norms and 11.15 per cent as per Basel II norms, with the support of Government capital of ₹1,200 crore and LIC subscription of ₹398 crore. During August 2012, the bank raised MTN funds of $500 million and allocated it for asset expansion at Singapore and Hong Kong. The bank has got approval to increase the size and tenure of the MTN programme to mop up another $2 billion (around ₹11,000 crore). This has enabled it to provide long-term funds for overseas operations.

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Published on July 25, 2014
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