Human capital is the most critical issue for banks -LiveMint
Bankers say the issue of scarcity of human capital is more critical than the requirement of capital and rising bad assets
More than requirement of capital and rising bad assets, all participants said scarcity of human capital is critical. The PSB chiefs strongly felt there is no level playing field and the role of government, governance and culture needs to be changed to prop up their valuation in the market.
R.K. Dubey, chairman and managing director (CMD) of Canara Bank; C.V.R. Rajendran, CMD of Andhra Bank; V. Kannan, CMD of Vijaya Bank; and Shyam Srinivasan, managing director and CEO of Federal Bank Ltd, participated in the discussion, moderated by Tamal Bandyopadhyay, deputy managing editor of Mint. Edited excerpts:
Tamal Bandyopadhyay: By the Reserve Bank of India’s (RBI’s) estimate, the banks need about Rs. 8 trillion in the next five years between now and 2019, when the new Basel norms kick in, if bank credit grows at the rate of 20% every year. Economic growth in Asia’s third largest economy has been slow in the past many quarters, but things have started looking better and the country is expected to come back to a higher growth path. One of the reasons why banks need more capital is that they have been setting aside a huge amount of money to take care of their ballooning bad assets. Against this backdrop, I’ll ask each of you to share your views on the challenges before banks if India comes back to a relatively higher growth path and companies start asking for credit.
Shyam Srinivasan: For a bank like us, which is relatively small in the pecking order, the opportunity is boundless. Even if India grows at 5-6%, we are well capitalized. So for us, it’s about gaining market share and not be constrained by capital. But for all banks, the challenge is how do you underwrite risk? You also spoke about bad assets, which constrain the lending capability.
The core of what we see that has worked in multiple environments in our country and abroad is that underwriting has largely been about “I know him and so I can lend to him”, from “I know the business, so I can lend to that business”. So, there is a core competency that needs to be materially lifted. With many influences that come on banking institutions both in the form of client pressure and regulatory pressure, there are often compromises that lead to this NPA (non-performing asset) challenge.
So those banks that have capital constraints need to figure out efficiency measures. The structural issue of how do you underwrite, how do you create independence in the risk origination, risk underwriting and risk collection is a material challenge, which more and more banks are becoming acutely aware of. The way ahead is to scale that capability because we are diversified. Federal Bank is not constrained by capital, but is constrained by the ability to gain share.
Bandyopadhyay: Essentially what you’re saying is that capital is not an issue; rather it’s risk management.
C.V.R. Rajendran: Yes, capital is not a major issue. My bank requires Rs.11,000 crore over the next five years if we’re growing at 20%. For this year and the next year, capital is not a challenge. Whatever government support is coming that should be sufficient. If at all growth comes and I’m able to recover the NPAs, it goes straight to the bottom line and that will increase profitability. The major challenge is to bring back enthusiasm in credit officers. They are wounded soldiers today. Bringing back the enthusiasm among them will take time. They are affected by the CVC (Central Vigilance Commission) inquiries, by internal action taken against them by banks. Today, the model is: originate the loan and keep it on your balance sheet. Going forward, the model will be: originate the loan and sell. If I’m not interested in growing a portfolio, I can sell it and still retain profitability.
Bandyopadhyay: You’re talking about securitization.
Rajendran: Securitization and various other options.
Bandyopadhyay: So, you’re saying much more than capital, the problem is the culture—CVC harassing your credit officers and destroying their morale.
Rajendran: Yes, people will take some time to come out of it.
V. Kannan: I look at this problem in a slightly different manner. You talk of 20% growth rate. What is more important is the growth rate of the risk-weighted assets. It doesn’t need to be at the same rate as the growth of advances. So, what is important is capital conservation—proper capital allocation for each type of business activity. We need to get into the issue whether the returns are commensurate to the capital deployed for that activity rather than yield on advances, return on capital employed.
The second is the ability of internal capital generation. As of now, for most of the banks because of the stress, this particular segment is restricted. So, for growth, we necessarily need to look at capital- raising—25% can be expected in core equity and 75% in other instruments.
It’s not been the right time for any PSB to go to the market to raise capital. The sentiment has to change. It can change with good results and from other non-financial matters. And if the market is not helping you, go back to the principal owner, the government. But no bank will get the entire amount and so we need to explore other instruments. It has to be tested and there are regulatory issues there. As of now, there is only one major player who can invest there. For the current year, capital is not a problem for Vijaya Bank, but if we’re talking about five years, it will be a challenge.
R.K. Dubey: We need to be optimistic. We need not be worried about the next growth cycle; banks are prepared for that. Yes, there will be differences between one bank and another, but banks are geared up for the growth cycle. We’re only looking for changes outside and inside that will make us function smoothly. I’m very optimistic about improvement in the economy in the coming years.
Our bank has been growing at over 20% and our asset quality also has been good. In March 2013, our gross NPAs were 2.57% (of total loans). We’re hopeful that the bank’s asset quality may not deteriorate. It may be around 2% in the coming year and by that time the economy is likely to improve. So, for Canara Bank, asset quality and growth won’t be problems and up to 2015, capital also is no problem. But there are other issues— infrastructure financing, human resources… Those guys who joined in the 1970s are retiring now. Suddenly, we’re recruiting thousands of people. Training so many people and integrating them with old employees is a challenge. The last point would be strengthening risk management and use of technology for financial inclusion and mobile banking.
Bandyopadhyay: All of you are claiming that everything is fine with your banks, but the RBI is concerned about rising bad assets and capital requirement. The investors are not bullish on PSBs. You will find it very difficult to raise money from the market as it is not ready to appreciate your value. Besides, the government stake cannot come down below 51% under current norms. Finally, the government cannot pump in taxpayers’ money to recapitalize banks year after year because of the high fiscal deficit.
Rajendran: I agree with you that there are a lot of challenges in raising capital. As you rightly put it, there’s not much interest in PSBs because of profitability issues. Dubey rightly said that the PSBs have not been able to leverage technology the way private sector banks have done. As far as skill sets are concerned, PSBs are not below private sector banks. It is only that the necessary freedom isn’t given to the former. That is a major challenge.
Bandyopadhyay: So the government comes in the way?
Rajendran: The government comes in the way. For quite a long time, profit itself was considered to be a sin. If a private sector bank has an NIM (net interest margin) of 4.3%, the market appreciates, but if a PSB has a similar NIM, the government and the RBI say you’re not supposed to have such high profit margins. Talk about directed lending—it’s not insisted on private sector banks to the extent it happens to PSBs. Interference in the private sector is much, much less.
Bandyopadhyay: Are you under pressure to lend to certain sectors?
Rajendran: To a certain extent, yes.
Bandyopadhyay: Essentially what you’re saying is that you don’t lack skill sets or expertise, but the problem is government rules and regulations.
Rajendran: We’re not on an equal footing with private banks.
Kannan: I agree with most of the points made by Rajendran. Why are public shares not favoured by the market? For historical reasons, PSBs have more exposure to infrastructure
.
Bandyopahyay: Because of pressure from the government?
Kannan: I don’t think there’s any pressure. It (exposure to infrastructure) is there in the books and it is not that easy to come out of it. Why would an investor look at a PSB when he has an alternative? He will only look for returns on the money he is investing. Along with the infrastructure exposure, there is stress and the long time it takes for resolution (of bad assets). PSBs also have a heavy ALM (asset-liability mismatch). Investors, particularly foreign and professional investors, take all these factors into consideration.
Then, there are issues of management and corporate governance. What is the quality of the CEOs, and the tenure and the composition of the board? The contribution of board members? How much freedom is there to make decisions? We may be delivering profits, but the market looks at consistency. I have the view that the share price is an indication of the discount of the future, not of the past performance. So if they have the confidence, the share price will go up.
Dubey: I see no pressures. The environment for PSBs and private sector banks are different, and they need not be compared. There are corporate governance issues, but they are there in private sector banks too. Every organization has a different set of issues, but those banks that are able to address them have lesser problems.
A few years ago our stocks were the darling of the stock market. Why is everyone so critical of the PSBs now? Nothing has gone wrong. Our fundamentals remain as they were then. As far as Canara Bank is concerned, the asset quality hasn’t gone weak, growth hasn’t gone down and nothing has gone wrong. The stock, which was at Rs.600 and rising to Rs.700, is now at Rs.300. It is the market sentiment that is down. Everyone is critical— the RBI, the analysts, and your column Banker’s Trust. Maybe in another two-three years, you’ll again see the stock going up and capital will not be that big an issue as it is being made out to be.
Bandyopadhyay: Shyam, you’re from the private sector. Why do you think the market gives a thumbs down to PSBs?
Srinivasan: As Kannan pointed out, the stock price is the discount of the future earnings. The crucial part is that ownership is one thing, but it is about the culture that is built because of the ownership. If you’re living in a country where more than 50% of the population is young and aspirational, then your staff need not necessarily be young, but should be youthful to reflect the requirement that is there in the market. How do you move from a culture of entitlement—which the system has long engendered—towards a culture of performance? And then the rewards follow.
Whether it is financial capital or human capital, it is driven by the kind of institution that you have and are you able to show continued, sustained progress. You’re hiring youngsters—they have a lot of energy, but very little experience. The middle-aged workforce is highly experienced. There’s a cultural mismatch, an ethnic mismatch and an experience mismatch. How do you foster that together, and bring a culture that requires leadership and a drill that needs to be deep into the organization? That’s the biggest challenge for the next three-five years… This is the time to talk less financial capital and talk more human capital.
Bandyopadhyay: So, capital is not a big problem, but there are other issues, and you are aware of your shortcomings and deficiencies. One critical aspect is the human capital, not the financial capital and you’re finding ways to tackle it. Thank you all
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