PSU lender Indian Overseas Bank (IOB), which has been facing huge bad loans, managed to cut its losses and reduce slippages in the first quarter of this fiscal. R Subramaniakumar, Managing Director & Chief Executive Officer of IOB, highlights the bank’s progress towards the turnaround. Edited excerpts from the interview:

How is the rebalancing of credit portfolio plan working?

Two structural issues have been addressed and fine-tuned continuously. First, knowledge gap at the field level at the time of delivery was filled. Second, the spread of advances in the mid and above segment at all non-traditional branches. The share of large corporate advances has been reduced to 45-46 per cent now from 56 per cent in March 2016 by reducing high risk-weighted assets to low risk-weighted assets. In this exercise, we have also improved the turnaround time and gained better pricing mechanisms to attract low risk-weighted assets that include AA to AAA-rated accounts and government-guaranteed accounts.

How have you achieved pricing edge to attract low risk-weighted assets?

A year ago, our rates were at 9.60 per cent when the MCLR regime began. It has come down to 8.40 per cent. This is partly funded by our increase in share of CASA (current account savings account), which has now increased to 30-35 per cent from 23-24 per cent three years ago and was 28 per cent last year. This has been achieved without reducing my total deposit levels. So, my cost of deposits (COD) dropped from about 7.37 per cent to 5.87 per cent. Thus, drop in COD helped us reduce MCLR to 8.40 per cent, which is giving us pricing power to lure low-risk assets.

What is the update on your bad loan position?

Our exposure was in 9 of the 12 large NPA accounts of the first tranche for resolution under reference to NCLT. These accounts constitute ₹7,000 crore (about 21 per cent) of our NPAs. In the second tranche of NPA accounts, our exposure was in 18 accounts and that constituted ₹3,000 crore – about 10 per cent of total NPAs. So, overall it is 31 per cent.

Earlier, there was no clarity on these. But with NCLT, there is some visibility. We don’t know what will be the resolution. But assume that if it is resolved and ₹10,000 crore or 31 per cent goes out of NPA kitty – if that happens, it will boost the bottomline and balance sheet, with a huge reduction in the amount of provisioning we have to make for NPAs.

In retail, our NPAs have dropped drastically from 6 per cent to less than 3 per cent. Sustained efforts on SARFAESI Act helped us cut the bad loan size.

On the other hand, we have been preventing further slippages. In the first quarter, our net accretion was only ₹355 crore of NPA. Now, the pace of recovery is higher than the pace of slippages. Our strategy of reducing slippage and increasing the recovery is working well.

What are you doing for credit growth?

A structural change has been effected in micro and small-scale lending segment. Now, every branch of IOB has to participate in two areas – micro and small loans. In a week, each branch should get two each of micro and small loans. This is the transition we have started.

We are now in the process of automating entire micro and small loan procedures.

In the recent quarter, we were able to touch 43 per cent as the priority sector lending. This indicates that the participation of branches has increased significantly compared to earlier. Some time ago, 78-80 per cent of branches may not participate in any loan on a daily basis. So, more number of branches now participates in one loan or the other, which is a big change as far as delivery of loan is concerned.

We also want to achieve quality credit growth. Hence, we have told the branches to fetch only four home loans and five vehicle loans a month. This reduces pressure on staff while giving them sufficient time for due diligence.

All these are yielding results and our retail disbursements are growing significantly. Our objective is to have a balanced credit portfolio with about 40 per cent of the large corporate and 60 per cent of other categories, which will be a good mix.

How will the proposed bank recapitalisation help IOB?

Recapitalisation is for two purposes. First, to meet regulatory prudential norms, and that is essential for any economy to sustain over a long-term. So, this move is a well-thought-out one. They want the system to sustain instead of showing weakness.

Second, recapitalisation will also help credit growth. Since banking sector provides 80 per cent of the credit to the industry, it has a bigger role to play.

When banks get capital, it helps to meet the prudential norms and provides some leg room for growth.

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