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Indian Banks on Track to Post 25pc Annual Growth

Most banks will see their business growing at least 10 times the current size by 2020, given the enormous opportunities emerging in India, said M.V. Nair, Chairman of Indian Banks’ Association (IBA), and Chairman and Managing Director of Union Bank of India.

“With more than $550 billion required to finance infrastructure projects including power, roads and ports, and another $150 billion to fund a projected 50 million housing units over the next five years, Indian banking sector is geared for exponential growth,” said Nair who was in Dubai recently.

Infrastructure Lending

Banks are expected to play a major role in infrastructure lending. Bank lending to infrastructure as a percentage of total gross bank credit has increased from 1.8 per cent in 2001 to 10.2 per cent in 2009, a compounded annual growth rate of 45 per cent, he said.

“While support is expected from the banking sector for infrastructure lending, we are facing roadblocks,” he said. In a bid to deal with an asset-liability mismatch, IBA recently sought concessions from the Reserve Bank of India (RBI) for lending to the infrastructure sector. Banks also have urged the finance ministry for permission to issue tax-free bonds and requested the RBI to exempt such bonds from cash reserve ratio and statutory liquidity requirements, Nair said.

The asset-liability gap is on the rise as most new deposits have been of shorter maturities such as one year while loans to infrastructure projects have tenures of 15-20 years, Nair explained. “We need huge resources to finance the infrastructure spending, and new instruments to raise funds,” Nair added.

Companies Going Global

Nair said Indian companies were not only on a fast growth trajectory but also going global. “Banking sector has to grow in tandem to cater to their growing demands.”

Financial Inclusion

Indian banks are seriously focussing on financial inclusion, as 50 per cent of the population does not have a banking account. The financial inclusion programme will ensure than banking facilities will be extended to all villages that have a population of at least 2,000 people by 2011.

GDP Growth Projection

India’s gross domestic product growth slowed to 6.7 per cent in the last fiscal year after three years of expansion at 9 per cent or more. Growth projected for the current fiscal year ending March is about 7.5 per cent, he said.

The IBA head declined to speculate on the new credit policy that will be announced soon by the government. “Now liquidity is abundant, and the economy is doing well. The question is how to make the exit from the current monetary regime while balancing growth and inflation.”

Unhindered Credit Flow

Nair said India could weather the impact of the global economic crisis faster and with less pain than most other economies. “India has a robust banking sector and we ensured that credit flow was not hampered during the crisis. Total credit sanctioned from October 2008 to May 2009 is 150 per cent of the sanctions made in the same period a year ago.” Besides ensuring unhindered credit flow, most banks restructured accounts to help customers tide over difficult times. The Union Bank of India, ranked fifth among the nationalised banks, alone had restructured more than 100,000 accounts to allow the industry to adjust to the downturn, he pointed out.

Nair said his bank achieved a topline growth of 30 per cent in 2008-09 fiscal as against an industry average of 25 per cent for the same period.

Expansion Plans

On future growth plans, Nair said, the bank, which currently has 2,750 branches, is positioned to boost its network to 3,000 by 2011.

Over the past one year, the bank opened 300 branches across India. Among the new branches, 75 will be located in places suggested through a survey conducted among non-residents, he said. Globally, the bank, after having obtained regulatory approvals, is looking at spreading operations to Toronto, London, Johannesburg and Belgium within a year. Currently, Union Bank has a full-fledged branch in Hong Kong and four representative offices — in Shanghai, Beijing, Abu Dhabi and Sydney.

Abu Dhabi Operation

Nair said the Abu Dhabi operation has been growing exponentially over the past two years, and handled 250,000 transactions last year.

“The Abu Dhabi office has a customer base of 50,000 that is growing fast thanks to improved product features and services.”

On expansion plans into other GCC countries, he said obtaining permission remained a challenge. “However, we are focused on the GCC market and pursue expansion plans.” When Union Ban of India opened its office in Abu Dhabi in 2008 January, a target was set to claim a five per cent share of the total remittances from the UAE to India by 2012. “We already account for two per cent of the remittance.”

Performance in 2009

In financial year 2009 (FY09), total deposits of the bank increased by 33.55 per cent to Rs1,387.03 billion (Rs1, 038.59 billion) and gross advances were up by 29.50 per cent to Rs982.65 billion (Rs758.78 billion).

The bank’s business (deposits + advances) grew by 31.84 per cent to Rs2, 369.68 billion in FY2009, outperforming projection.

As on March-end 2009, the bank’s capital adequacy ratio as per Basel I stood at 12.01 per cent (12.51 per cent as on March-end 2008).

As per Basel II the bank’s CAR was 13.27 per cent as on March-end 2009.

The bank’s board has recommended a 50 per cent dividend for the year 2008-2009.

The state-owned bank recently introduced a new scheme that offers higher rates on deposits with a specified maturity. This is for the first time in over a year that a large bank has raised rates on retail deposits.

The bank, which was earlier offering 6 per cent a year on one to two year deposits, is now offering 6.75 per cent on deposits with a maturity of 555 days. The scheme, which is open for deposits less than Rs10 million, came into effect from January 1.

issacjohn@khaleejtimes.com