UCO Bank is working on a three-pronged strategy to improve its net interest margin, the CASA (current account and savings bank account) ratio and the cost to income ratio. The bank is looking to bring down costs by outsourcing some of its “non-core operations”. It is also ramping up its digital initiatives and sensitising branches to improve the CASA ratio.
The bank’s share of CASA to total deposits stands at close to 38 per cent, which is low compared to the general banking average, which is close to 45-46 per cent.
“We are acutely conscious of the fact that our CASA is much lower compared to the other banks, and we are also aware that lower CASA also has an impact on the cost of funds. We are working towards improving the CASA. Digitally, I should say that now, since a lot of things have gone digital, we are also trying to develop digital solutions, especially to the merchants, for the purpose of growing our CASA,” Soma Sankara Prasad, MD & CEO, UCO Bank said in an earnings conference call transcript.
Net interest margin
The bank’s net interest margin (NIM) is currently below 3 per cent at around 2.99 per cent. This is when some of the public sector banks have a NIM of around 3.3 - 3.4 per cent and some of the private sector banks have above 4 per cent. So low NIM is one area which the bank is “very conscious”, he said.
On the cost to income ratio, he said, while it is high for most of the public sector banks, UCO Bank’s cost to income ratio is much higher than other PSBs. There are several reasons for higher cost to income ratio including employee cost and certain other costs.
“Some of the private sector banks are able to engage people using a model, where they are not actually on the rolls, right, a number of employees may not be on the roles, but they’re taken on an outsourcing model from some other agency. So, with the result that you get a lower cost. I mean, that is what even the public sector banks are now aspiring to do. Bank of Baroda has already done by setting up an agency. So that is something we are looking at for bringing our cost to income ratio low, because one of the major costs for all the public sectors banks is the employee cost, that is accepted. So how do we bring it down in all the non-core operations, let us have people from an outside agency where we pay much less so that your cost to income comes to down. So, we are working on that. We are not there yet, but we are aware of the fact that the cost to income is high,” he said.
Sustainable credit growth
There is also a need to increase income much more than the cost by ensuring a sustainable credit growth. Some of the sectors where the bank expects a good growth coming in is the NBFC, retail and MSME among others.
UCO Bank, which came out of PCA in August 2021, has been laying greater emphasis on growth. It has also been focusing on the quality of underwriting thereby helping bring down slippages to a great extent. The focus has also been on recovery of bad loans. There has been 226 basis points decline in gross non-performing assets from 7.89 per cent on March 31, 2022, to close to 5.63 per cent as on end December 2022.
The bank’s co-lending book outstanding is about ₹1,000 crore. It primarily comes from gold loans but recently it has also entered into a co-lending partnership with Aadhaar for housing loans and Paisalo for smaller loans. It has also entered into partnership with one of the other companies for SME loans, he said.
Share of RAM
The share of RAM (retail, agriculture and MSME) and corporate in total advances currently stands at 61 per cent and 39 per cent respectively. When the bank went under PCA it had started focusing on growing its RAM portfolio to enhance its margins. The bank, Prasad said, continues to be careful when it comes to the corporate loans and focuses only on entities rated A, and above.
“The emphasis going forward would always be to maintain a 60:40 RAM and corporate ratio because it makes sense for the bank as far as the NIM is concerned, and as far as the loan or delinquency is concerned,” he said.