Reforms set to help Indian banks to cut bad loans
Union Bank of India will open 100 domestic branches this year, says top executive
India's new banking reforms, including the country's first national bankruptcy law, will have a far reaching positive impact at a time when financial institutions, especially public sector banks (PSBs), grapple with a growing pile of bad loans, the head of one of the leading lenders said.
The national bankruptcy law, recently passed by India's parliament, could transform one of the slowest insolvency regimes of any major economy into one of the fastest by enabling lenders to recover their dues within six to nine months in contrast to the current system in which banks often have to wage protracted legal battles to recover debts, said Arun Tiwari, chairman and managing director of Union Bank of India (UBI).
UBI, which made a loan loss provision of Rs20.08 billion in the January-March 2016 quarter, is the only public sector bank that did not run into red although it posted a 78.34 per cent fall in net profit in the quarter.
Although a sharp jump in loan loss provisions was a drag on UBI's fourth quarter bottom-line, it is the only bank among public sector units that had posted a profit in the quarter. "Our prudent policy had saved us. The current year, we hope to bring down non-performing assets [NPAs]," Tiwari told Khaleej Times in an interview during his visit to the UAE.
Mounting NPAs have become one of the biggest challenges faced by India's banking system. The country's 20 PSBs had to write off more than Rs1,140 billion of bad loans in 2015-16. The Reserve Bank of India has given banks time till March 2017 to clean up their balance sheets and provide for all stressed assets in a move to prevent a probable systemic collapse.
The overhaul of the banking system also comes at a time when billionaire liquor baron and owner of defunct Kingfisher airline Vijay Mallya fled India after defaulting on debts estimated at more than Rs100 billion.
"We should not be finding fault with public sector banks for the huge build up in NPAs. When the economy was booming since 2008, a lot of infrastructure projects were launched and public sector banks came forward to fund most of the requirements. When the economy went down, these projects got hit as commodity prices plummeted globally," said Tiwari.
He said 60 per cent of UBI's NPA is coming out of its portfolio financing which is the core sector. "Now I see green shoots in steel, which was the hardest hit. Since steel consumption in India is one of the lowest in the world, there is a lot of potential for the sector to recover fast."
UBI, which operates a full-fledged branch in Dubai International Financial Centre, has seen 8.7 per cent growth in its loan book, including trade lines, ECB loans and trade finance across all industries in the current year.
"We are happy with the performance. We are a bank that is regulatory-compliant. We prefer not to do business than to be on the wrong side of the law. If our business is not regulatory-complaint, we will not do that," said Tiwari.
He said UBI is on an expansion mode within and outside India. "Every year, we are opening one overseas branch. This year, we will open one in Shanghai. Our next foray will be Africa. In India, UBI is on track to open 100 branches this year at those centres which are showing growth potential."
Tiwari is upbeat about the Indian economy in general and the banking industry in particular. Banks in India are forecast to record 10 to 11 per cent growth in credit lines.
"Given the kind of reforms this government had initiated over the past two years, the economy has to grow at a faster pace of 7.5 per cent and the banking sector will continue to be a greater partner in the growth story. Banking gives wheels to the economy and if the economy picks up, the banking sector will also boom," said Tiwari.
He said UBI is focusing on increasing advances to retail, agriculture and micro, small and medium enterprise segments. "By focusing on these, we get better returns, our risk is spread and we get a larger customer base."
He said one thing that differentiates Union Bank of India is that "we are working on the past one year on predictive business analytics. Nobody has done it before. This is giving us excellent results."
"As of today, 67 per cent of our customer-facing transactions are e-transactions, one of the highest in India. In the next one year, we want to enhance it to 75 per cent," said Tiwari.
On the current initiative of bank amalgamation, he said: "Banking is not arithmetic. It is human chemistry. Financials can merge, but what about the culture? So, our government is creating an environment whereby intended partners can merge or consolidate."
"Is consolidation for size or efficiency? I believe if merging of banks results in enhanced efficiency, it is good. Every bank should find its own niche area," said Tiwari.
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