“We are sitting on a gold mine”

Weak economic environment and the persisting pressure on asset quality continue to weigh on public sector banks’ earnings.

Business Line spoke to K. R. Kamath, Chairman and Managing Director, Punjab National Bank , to take stock of the challenges the bank faces and how it plans to tackle them.

Non-performing as well as restructured assets saw a spike in the September quarter. When do you think these will stabilise?

Asset quality is a direct reflection of the state of the economy. It cannot improve unless the economy turns around.

If a loan account can be given a lifeline by restructuring, we will prefer to do so. Sometimes, these accounts do turn into non-performing assets (NPA), but not all the time.

That said, within the organisation, we are setting procedures and standards to control asset quality deterioration.

For one, we try to control fresh delinquencies. Second, we try to increase our recoveries from loan accounts.

Even then, recovery remains a challenge. Even if we are able to bring up the asset for sale, most of the time there aren’t any buyers. One can also look at the current situation in another way. We are sitting on a gold mine.

If a turnaround happens, the benefit that will flow into the business will be substantial. When will such a turnaround happen remains a question. We have started seeing some green shoots

You have high exposure to stressed sectors such as infrastructure and power. Does that explain your high NPAs?

Yes. But a public sector bank has a social obligation where it needs to lend to core sectors. Also, we believe in hand-holding a client during trying times. While others may exit when there are problems, public sector banks continue to support customers.

So are you consciously avoiding fresh lending to stressed sectors?

In sectors such as power, we are conservative towards lending for a new proposal. But in cases where loans are already sanctioned, disbursements need to happen.

Even after project finance lending is done, working capital financing is required. Also, if there is a well-established business group, we may lend based on the financial and credit assessment. Which means, we are now selective in taking new exposures.

Last year, PNB started consolidating its loan book to contain further slippage. Is the phase over?

In the past one year our loan book has grown in single digits as we had decided to pursue a balanced growth strategy. For instance, we shed our unsecured corporate loans which we felt could cause problems.

Similarly, we came out of inter-bank participation certificates (issued by banks to raise or deploy a short term surplus) .

Even on the deposit front, we brought down our high cost bulk deposits from Rs 83,000 crore last year to Rs 25,000 crore in the September quarter.

Thus bulk deposits now constitute 6 per cent of our deposits from 21 per cent last year. We have clearly focused on business coming from field. While the consolidation has lowered our loan growth, we should be able to catch up by the end of 2013-14. From October this year, the base effect will come into play as our consolidation process started a year ago. This should help us grow our loan book by 15 per cent by March 2014. That growth will be driven by retail, SME and agriculture segments.

What is your outlook on margins?

So far, we have maintained our net interest margins (NIMs) at 3.5 per cent. But now that we are starting to build our customer base across AAA or AA-rated companies, margins may slip a bit; the yields on such loans are lower.

Retail loans are also offered at very competitive prices. Competition is picking up even in the SME segment.

Does the fresh infusion of Rs 500 crore from the Government into PNB come with caveats?

No, this capital infusion has noconditions. But the government has indicated additional capital infusion based on the retail lending we do. But such lending was not happening due to lack of demand, not lack of capital.

So, will you offer concessional rates to retail segments?

The Government wanted us to offer some attractive retail schemes, which we have already done. For instance, we offer housing loans at 10.25 per cent.

We have also cut rates on car, two-wheeler and consumer durable loans by 1 to 2.5 per cent. So far, we have lent Rs 1,200 crore under such schemes, predominantly for housing. The pick-up in consumer durables loans has not been much though.

We normally see that when fresh capital is infused into PSU banks, their return on equity and book value gets diluted. Is there a way to avoid this?

This happens due to the time lag between getting the capital and its usage. Only when we leverage the capital and lend it do we get the payback.

That’s why we prefer the capital being infused in the beginning of the year rather than at the end. At least this year, we will receive the funds by December; so the capital will be deployed for at least a quarter.

radhika.merwin@thehindu.co.in