Important is return on equity, not topline: Bank of India CEO

Bank of India (BoI) is banking on a ‘4C’ strategy – reduction in concentration risk, capital optimisation, consolidation (of business), and compliance culture – to build a stronger balance sheet for the future. While acknowledging the stress that has accumulated on the balance sheet over the years, Melwyn Rego, MD and CEO, emphasised that management of non-performing assets (NPA) is the top priority.

Besides, augmenting low-cost deposits and rebalancing the loan portfolio in favour of retail assets figure prominently on the to-do list.

In an interview with BusinessLine, Rego, who took charge in August 2015, outlines his thoughts on the road ahead for his bank. Excerpts:

How do you plan to stem the spike in bad loans?

The NPA numbers show very clearly that growth has been quite significant.

But our intention is to have a total clean-up. So, we have created a separate recovery vertical. A ‘mindset change’ in employees has been brought about – from one of only growth, to focus on recovery and bottomline.

As a result, our efforts have borne fruit because while slippages have been there, there has been tempering of net slippages (fresh slippages less reduction in bad loans due to recovery, upgradation and write-offs) in this quarter.

For instance, in the June quarter of 2015, net slippages were at ₹4,696 crore. In the March 2016 quarter, it was ₹13,360 crore. Now, in the June quarter this year, net slippages have been ₹1,996 crore.

Now, during the course of this fiscal year, recoveries have shown improvement. If you look at recoveries and upgradation, the total of that last year was ₹8,547 crore.

This year, in the first quarter itself, we have achieved ₹3,179 crore. The target we have fixed for recovery and upgradation is ₹17,500 crore and we do not expect slippages to exceed this amount.

What specific steps have you taken towards this end?

We have put in place a system whereby every NPA will be looked into.

There are levels of responsibility that have been delegated – for instance, at the branch, zonal, national banking group (NBG) and head office levels – based on certain thresholds in terms of the amount.

Also, as part of the digitisation process, monitoring of each account will be done at the head office to see that each account has been looked into.

Now, we have resorted to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (Sarfaesi), in all cases where we felt that restructuring will not work, for the entire NPA portfolio.

The success rate in Sarfaesi has been about 8-9 per cent.

What is your low-cost deposit target?

Coming to CASA (current account, savings account), what we are looking at is (maintenance) on a daily average basis (which is what lowers the cost of funding) and not on a closing (quarter-end) basis.

CASA in March 2015 was 29 per cent (of total deposits). This has increased to 35 per cent as of June-end 2016. This means that our strategy of CASA augmentation has paid off, and we are now targeting 37 per cent by the end of this year.

The share of term deposits of ₹1 crore and less has grown by 10 per cent year-on-year and now constitutes 72.3 per cent of total term deposits, compared to 66 per cent as at June-end 2015.

How do you plan to reduce concentration risk in the loan portfolio?

When it comes to rebalancing the loan portfolio, reduction in concentration risk is key.

In June 2015, the corporate loan portfolio accounted for 56 per cent of total loans and retail was at 44 per cent. Now, we have increased the retail portfolio to 48 per cent as of June 2016, and the corporate portfolio now stands at 52 per cent.

The target over the next one-and-a-half years is to ensure that the retail portfolio (comprising home loans, mortgage loans, auto loans, agriculture loans and micro, small and medium enterprise loans) grows to 55 per cent, and to take the corporate portfolio to about 45 per cent.

The focus, very clearly, is on home loans and loan against property, where we have grown by 19 per cent in the last one year. We have given granular targets to each of the branches. Again, on the asset build-up side, these targets are not on year-end numbers but on a daily average basis.

Business should be steady throughout the year, and the focus is on working on a weighted average basis – both in terms of the advances side as well as the CASA side.

What are your plans for sale of non-core assets?

We have planned for sale of non-core assets aggregating ₹1,000 crore. We have already entered into an agreement for the sale of 18 per cent in Star Union Dai-ichi Life Insurance Company to our JV partner Dai-ichi.

Thereafter, our shareholding will drop from 48 per cent to 30 per cent. That will take care of more than 50 per cent of the ₹1,000 crore that we plan to raise.

In the case of other associates, we are looking at getting valuations done. The insurance company deal will take place in the second quarter itself. We are in the process of getting regulatory and statutory approvals.

Are you deliberately de-growing your foreign business?

Currently, our foreign business accounts for 27 per cent of the global business. We have actually de-grown in this area (from 29 per cent in the March 2016 quarter), because we don’t want to do unremunerative business.

For instance, in buyers credit, the margins are very thin. If you do business at 30 and 40 basis points (bps) and also have to provide 40 bps for standard assets, there is nothing left.

Therefore, there will be some de-growth in this area. Overall, we are looking at domestic (business) growth of 12 per cent. Foreign business will de-grow by 8-9 per cent. So, the overall adjusted growth will be 6-7 per cent in FY2017.

We have to go back to the basics of giving returns to shareholders. It is not the topline that is important. It is really the return on equity that is important....We are working towards building a stronger balance sheet for the future. It is not a process that can happen overnight. We have initiated this process – so that in the next two three years, we will be extremely strong and can reward our shareholders.

When do you see things really improving for BoI?

The numbers I shared with you tell the story. I see stress for the next three quarters – though of a significantly lower magnitude as compared to the past.

All efforts will be made to reduce slippages. I do see FY2018 as the year when we can say that our efforts have borne fruit.

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