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Performed Better than its Peers in US, Europe And UK Interview with M. D. Mallya, CMD, Bank of Baroda

What is your assessment of the current situation in the banking industry in India?
Banking sector in India has grown well with a deposit growth of 24 percent and advance growth of around 20 per cent.  Due to the signs of revival evident in the economy we expect SME, Retail, Agriculture, Service Sector, Infrastructure, Exports and other industries to grow well during the year 2009-10 opening up scope for banks to step up business growth.  RBI has set a growth target of 20 per cent now revised to 18% for growth of in advances during the current fiscal.

At the sectoral level, the performance of agriculture sector during 2008-09 was satisfactory. The Central Statistical Organisation (CSO) has projected agriculture and allied activities to grow by 2.6% in 2008-09. According to the Second Advance Estimates of GDP, the total food grains production during 2008-09 would be around 227.9 million tones as against 230.8 million tones in 2007-08. Industrial sector, however, experienced a loss of growth momentum during 2008-09 with the year-on-year expansion being 2.4% as against 8.5% in 2007-08. Similarly the core or infrastructure industries recorded a lower growth of 2.7% in their production during 2008-09 as compared to 5.9% during 2007- 08. Within the core sector, slowdown was more pronounced for steel and crude oil segments. The primary contributor to industrial slowdown was a lower investment and a subdued private consumption demand. The government consumption expenditure, however, remained buoyant on account of fiscal stimulus measures and committed expenditure.

During the seven month period of current fiscal, among the major constituents of Index of Industrial Production (IIP), manufacturing sector grew 7.1 % on YoY compared to 4.5% April – Oct 08, mining sector grew 7.9% (3.8%) and electricity grew at 6.5% (2.8%).  Production of capital goods, which is a proxy for investment demand in the economy, was up 12.2% in October, 2009 (4.2% in the same month last year).

Growth rates in October 2009 for Intermediate goods at 14.3% (-4.4%), basic goods – at 5.00% (3.2%), consumer durables at 21% (-1.6%) and consumer non-durables at 8.1% (-0.6%), are indications of recovery of the economy. After remaining in the negative zone for many months, the country’s merchandise export turned positive in November, 2009, logging a growth rate of 18% in dollar terms as compared to the year-ago period.  These are goods signs for the banking industry as a whole.

How do you view the Indian banking sector’s significant progress since nationalization?
The major structural change in the banking architecture came with the commitment of the government to implement social control on banks to make them realize national goals of developing grass root economy. Fourteen major banks were nationalised in 1969 and six more in 1980. With this, the major segment of the banking sector came under the control of the Government. Some other social control measures were also implemented such as assigning priority sector lending targets. This led to massive expansion of branch network to better provide banking access to masses across the country, especially in rural areas. These developments created a strong network of PSBs meant to bring about socio-economic transformation in the society. The penetration of PSB network helped in mobilizing the deposit resources from the public and stepping up credit dispensation in the hinterland. The share of credit to agriculture, which constituted a small portion for a long time, improved significantly with the onset of lead bank scheme and district credit plans. However, the objective to provide credit at concessional rate led to the administered structure of interest rates and other micro controls. Many places which lacked banking access are also brought under the umbrella of ‘financial inclusion’, though much more yet to be done. The more exciting phase of banking came with the onset of bank reforms transforming PSBs into dynamic, smart and tech-savvy organizations capable to disseminate global standards of banking services.

Where does Indian banking sector stand compared to international banking sector?
Banking industry in India has performed better than its peers in US, Europe and UK. The intensity of impact of global financial crisis has made all the difference. Most of the Banks/FIs had to succumb to the crisis of confidence arising out of financial crisis on account of Mark to Market (MTM) losses. But since Indian banks were not having significant holding of asset-backed securities, the impact has been less severe. This was mainly due to more prudent regulatory system and better governance of risk management systems.

What are the key issues facing banking sector today?
Compared to India’s growth at more than 9 percent in the last three years; the year 2008-09 did witness a decline to about 6.7 percent due to the global recession. Due to the rapid globalization in the last few years, the externalization of the Indian economy too has been rapid. The dependency for the growth of Indian economy is no more confined to domestic economy. The volumes under exports/imports having come down due to global slow down, Indian economy too slowed down with cascading impact on banking sector.

The recent signs of revival of Indian Industrial production, surge in capital market sentiments, increasing FOREX reserves, rise in demand for exports and positive rise in service sector are definite indicators of potentiality of Indian economy to do better. Though scanty monsoon is poised to threaten agriculture and CPI driven inflation posing larger challenge, Indian economy will show resilience.

Despite the gyrating economic growth, Indian banking sector has done well in 2008-09 with potentiality to do better in 2009-10. The critical challenges could be the following:

Leveraging technology for business growth.
Improving Asset Quality
Augmenting fee income
Enhancing overall profitability
Maintenance of Capital Adequacy Ratio
Integration of Risk management systems
Grooming, retaining Talent and Succession Planning Corporate Governance

What are the thrust areas for banking sector in India?
Thrust areas will be mobilization of low cost deposits. Innovating customized mix of short deposit products to attract more resources at economical cost by using technology will be desirable.

The major focus areas will be financing technology and digitalization, nano-technology projects, IT parks, retail sector, health care, health clubs, lifestyle ventures, development of fashion and design technology, private security services, training and private education, knowledge parks, entertainment industry, travel and tourism.  Infrastructure projects such as Express highways, multiple flyovers, bridges, development of waterways, ships and ship building, ports, airports, power, telecommunication and such other projects.

Other focus areas could also be financing agro and agro based food-processing industries. Floriculture, horticulture, processing and export of seafood and organic farming. Financing units generating commercial non-conventional energy such as solar, windmills, energy from recycled waste, projects reducing carbon emission; green projects etc will also be needing attention.

How do you look at the future of Indian Banking Sector?
In terms of business growth, banking industry is set to grow well in the coming years. The pace of deepening of banking system in India is still low. While the financial inclusion ratio is said to be in the range of 44 per cent, only 59 per cent of adults in India have a bank account. Banks can expand to reach out to more people. The only issue is the cost of reaching. The Rathdrum Rajan Committee has recommended increased use of Business Correspondent/Business facilitator model which PSBs have begun to use.

The bank assets to GDP ratio is 93.3 per cent in 2008-09.  Credit to GDP ratio and deposit to GDP ratio is at 52.2 per cent and 72 per cent respectively.  These ratios have abundant scope to rise in the years to come to compare well with international standards.  A cross-country comparison indicates that bank assets to GDP ratio in India in 2001 is 48 percent compared to Indonesia (101 per cent), Korea (98 per cent), Philippines (91 per cent) and Malaysia (166 per cent).   They compare much lower with developed economies such as UK (311 per cent), France (147 per cent) and Germany (313 per cent).  This comparison and status of Financial Inclusion reflects immense untapped potentiality.  Moreover Gross Domestic Savings rate in India is high compared to many developed countries affirming its appetite to save more.   PSBs are gearing up fast to catch up with the rising business volumes by restructuring their work processes and procedures.

What will be the future strategy of Bank of Baroda?
To begin with, we would like to continue with the accelerated growth that we have been able to experience in the last one year. We would like to grow with a compounded annual rate of more than above 30 percent. Similarly, we would try to enhance Bank’s efficiency to create a new benchmark in the customer service and carve out a niche in the Banking Industry.

On the whole, the Bank has the aspiration to increase the return on assets (ROA) from the present level of 1.09 percent to 1.2 percent by better managing spreads and containing gross / net NPA levels.

In order to achieve optimum efficiency, Bank is consistently working to bring about qualitative transformation in the business mix and improve the productivity.  We continue to emphasis on emerging as a customer-centric bank with a strategic intent to deliver state of the art technology to our customers.  As a part of positioning our Bank, we are reaching out to customers by offering e-products and launching customer awareness campaign in the media through Baroda Next.  

We are also actively pursuing skill building programs and imparting leadership development to senior functionaries to prepare the Bank for the future.  With these strategic initiatives, the Bank is well poised to grow at a rate much beyond the industry level to surpass the aspirations of the stake holders.

The essence of our strategies could be evident from Bank’s motto for the year 2009-10 “Maximizing growth and profit through enhanced customer orientation”.

During the year 2009-10, the Bank would continue to perform with a thrust on “Growth with Quality” by focusing on low-cost deposits, by further reducing the dependence on bulk Business and by protecting the asset quality with a firm control on the process of credit origination. The Bank’s business plan and broad strategy in the year 2009-10 to achieve its corporate goals, objectives and to explore newer business opportunities in the domestic as well as overseas market would be as under:

Reorienting its systems and procedures towards customer convenience and enhanced customer satisfaction.
Formulating and adhering to the best corporate governance practices with an aim to set high standard of ethical values, transparency and disciplined approach to achieve excellence.
Focusing on a consistent and broad-based resource mobilization plan.
Enlarging the base of retail customers by leveraging technology and taking newer technology based initiatives.
Diversifying the loan book and managing the credit risk effectively.
Penetrating deeper into hitherto unbanked centres/ customer segments.
Aggressively canvassing non-fund based business so as to improve the share of fee-based income.
Maintaining a fine balance between the size and the strength of the Balance Sheet by managing Net Interest Margin (NIM), Risk Profile of the Bank and improving the Cost-Income Ratio. 
Enhancing the image of the Bank as a Customer Centric Organization.

In the next 2 to 3 years the Bank will strengthen its diversification process to become a financial conglomerate capable to provide most of the financial and international banking services to meet the aspirations of globalizing customer base.

What would you advise your customer to be the best way to manage money?
The best way to manage money should be in accordance with the age profile, financial standing and risk appetite.  We would prefer that more and more people should develop the habit of saving money in our Savings and Recurring Deposit accounts and graduate to Fixed deposit accounts matching the tenor with their financial needs.

Investing in mutual funds is always subject to market risk and one should be able to assess the pros and cons of moving to mutual fund products. As a part of diversification our Bank sells insurance and mutual fund products of our own subsidiaries and also of other companies within the guidelines of the RBI/ SEBI/ IRDA.  Our joint ventures Baroda Pioneer Asset Management Co Ltd. and India First Life Insurance Co. Ltd. are doing well, offering range of products. We invite customers to buy these products according to their requirements after studying the inherent risks and return.  A proper distribution of investments is necessary to enhance optimization of yield.

What are you doing about improvement of the service of Bank of Baroda?
Our bank has been taking several initiatives to transform into a technology driven customer centric bank well equipped to meet the changing aspirations of our customers. Thus, we have set a higher benchmark in terms of providing quality customer service. Moving to core banking platform, introduction of various e-delivery channels, setting up centralized loan processing centers, moving many of our back office operations to city back offices/Regional back offices are some such steps to transform our bank branches into efficient sales and service outfits equipped with modern interiors befitting a bank of international stature.

How do you see the banking industry in the year 2020?
Banking Industry – backbone of any economy
Exponential growth
Few High net-worth Banks occupying major space in the Banking Industry.
Mobile Banking becomes the in-thing.
Credit delivery at a faster pace with less paper work
Well regulated and fundamentally strong banks catering to clients spread all over the world at international standard.
Keeping in view the huge potentiality of business, banking industry is poised to grow in geometric proportion. Bank credit to GDP and Bank deposit to GDP ratio is still very low compared to even some of the South-East Asian economies. The financial inclusion is also low calling for more concerted efforts to penetrate deep into the hinterland. Delivering banking services to every section of the population is a daunting challenge. Moreover India enjoys a demographic dividend with young and productive population on the surge. These indicators point towards an exciting journey of banking growth in the coming decade.

Technology driven delivery models, business process re-engineering to align bank’s internal work procedures with IT architecture, entry of more risk-based products, more globalised hedging products will occupy the centre stage. Agricultural finance, SME, infrastructure, corporate finance and financing of foreign trade would continue to hold significance.  With mass penetration of mobile telephones, increased internet services and widespread expansion of wireless wifi facilities will be able to help banks expand virtual banking services.  We can also foresee more global players entering Indian Financial markets.  Lifestyle changes and spread of culture of nuclear families will lead to shift in the spending habits encouraging use of more plastic money.

Priority sector targets have not been met in many cases… - What is the reason behind it?
As far as our Bank is concerned Priority Sector Advances of the Bank surged from Rs 31,681 crore as at the end-March 2008 to Rs  9,239.08 crore as at the end-March 2009 and formed 46.43% of the Adjusted Net Bank Credit (ANBC) against the mandated target of 40%. The Agriculture Advances of the Bank recorded a growth of 28.0% over the previous year and rose to Rs 16,964 crore as at end-March 2009. Under its flagship agriculture loan product “Baroda Kisan Credit Card”, the Bank issued as many as 1,78,442 Credit Cards during 2008-09 to provide credit to farmers. The Bank has financed as many as 2,11,948 new farmers during the year 2008-09. As a part of its micro-finance initiatives, the Bank credit linked 19,120 Self Help Groups with an amount of Rs 17 crore during 2008-09, thereby taking the total number of SHGs credit linked to 90,731 amounting to Rs 606 crore.

What about recent activities of Bank of Baroda?
The Bank has identified specialized skill needs in the areas of credit processing, project management, IT, treasury, international banking, marketing, risk management, FOREX, equity, mutual funds, insurance and commodity markets. Bank also needs talent pool as financial analysts, foreign trade specialists, HR specialists, economists, training, development and research oriented staff.  Bank has already begun the process of acquiring such talent by Campus recruitment and lateral recruitment.  In order to groom internal talent and to prevent flight of talent, Bank has been aggressive in conducting internal promotions to higher cadres on fast track.  Particular care is taken to groom leadership talent with the help of leading B-Schools beginning from Middle / Senior Management cadre to ensure that the Bank prepares well for future expansion growth.

As a step to improve talent pool, the Bank is building Strong Foundation for Future Growth by recruiting the best possible talent in the country drawn from Premier Business Schools. We are also working on a Business Processing Reengineering project in consultation with Mckinsey & Co. so as to achieve optimum use of technology and right skilling of the manpower to yield maximum customer satisfaction.

We are trying to infuse a culture of sales and marketing in the bank, where our employees move out, meet people, solicit business and get more business.  We intend to qualitatively transform the business mix of the bank and improve the productivity and efficiency.

Keeping in view the low level of penetration and increasing awareness towards insurance bank has sensed the opportunities to diversify into insurance sector. Therefore bank is strongly pursuing its plan to set up a joint venture life insurance company.  The Bank could tie up with a globally reputed UK based insurance company Legal & General, UK, which is present in the market for over 100 years. The joint venture would have initial paid up capital of Rs. 200 crores of which major share holding of 44% would be with Bank of Baroda, 30% with Andhra Bank and remaining 26 % with Legal and General UK. The company has already been formed. We have received the first level of license from the insurance regulator.

We are confident to roll out the life insurance joint venture insurance company and start selling Insurance products by the end of this fiscal. With this, we will be having a wide range of insurance products providing choice to our customers.

Any comments on Government Policy?
The monetary / fiscal measures initiated by the RBI / Government, in the wake of the economic crisis, were on the right track, as evidenced by the buoyancy in the economy in the recent months.  However, the time has now come to unwind the stimulus package and contain the inflationary trend which is being witnessed at present, before it goes out of control.   In order to bring about a balance between the demand and supply, it is of paramount importance to restrict the excess liquidity available in the market by way of an increase in CRR or other monetary tools.

Have you any observations on any other issues?
Each set of banks such as public sector, old private sector, new generation banks, co-operatives and RRBs and foreign banks will have to create there own niche market developing a unique market differentiator.  As far as public sector banks are concerned, better human touch in building relationship and providing emotional and psychological comfort to the customers can be one of the key market differentiator. Improved delivery models, transparency, better corporate governance and high disclosure standards will be in the watch list of investors. Therefore banks have to pursue best practices in its governance to improve stakeholder value.

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