Executive Speak: Yogesh Agarwal, Chairman and Managing Director

Q. The global financial crisis brought havoc in the banking industry worldwide; however Indian banks have so far managed to remain comparatively shielded from it. To what factors do you attribute the resilience of the Indian banking industry at a time when many large banks succumbed globally? How much has the conservative approach of Indian banks contributed towards the resilience of the Indian Banking industry?

A. The global market meltdown has shaken all of us. The crux of this issue is attributed to significant mis-pricing of risks in the financial system. The impact was compounded by relatively easy monetary policies at major financial centres and globalisation of liquidity flows, possibly without adequate safeguards. Complex and structured derivatives and inadequacy of majority of stakeholders in understanding these innovations also played their part. The crisis has left us with many unanswered questions. However, in Indian banking scenario, the pursuit of financial stability is being achieved through perseverance of prudential policies, which prevent institutions from excessive risk taking. It also checks financial markets from becoming extremely volatile and turbulent. This resilience of the Indian banks can be attributed to Reserve Bank of India, which has been effectively able to manage domestic liquidity and monetary conditions consistent with its monetary policy stance. This has been enabled by the appropriate use of a range of instruments available with RBI such as the Repo/Reverse Repo rates, Cash Reserve Ratio (CRR), and Statutory Liquidity Ratio (SLR), the Market Stabilisation Scheme (MSS) and the Liquidity Adjustment Facility (LAF).

Q. What are the key growth drivers for the Indian banking industry? What are the emerging trends in the Indian banking industry?

A. The banking sector in India is set to continue with tremendous growth in the coming years. The enormous funding requirements of the Indian economy as also globalisation of Indian economy would lead to this enhanced opportunity. For the current financial year, I expect that total assets of banking industry would grow by around 20%, which is quiet healthy.

In subsequent years also, such growth would continue, primarily driven by the retail sector, infrastructure, agriculture and SSI/SME sectors. More importantly, the coverage of banking services would increase through financial inclusion.

As the economy grows and the financial sector develops, there will be higher degree of penetration of the formal financial sector and accordingly, banking sector will grow further, at least till the level of other developed countries with similar bank loan to GDP ratio. Demand for bank credit continues to remain high in consonance with strong economic activity. The growth in credit to the wholesale (non-individual) segment of the customer is a derivative of the strong, stable and diversified GDP growth.

Q. What is the take on the prevalent interest rate scenario in the economy? Where do you see the interest rates heading towards in the near future?

A. The interest rate hike cycle globally seems to have reached its final stages. While inflation remains under control, deft handling by RBI of the monetary situation has ensured financial stability along with appropriate liquidity. Under normal circumstances, interest rates are expected to remain stable over the medium term with marginal upward bias during the next few months.

The volatile interest rate scenario has generally led to re-pricing of the portfolio of the banks on both asset and liability sides. On an overall basis, however, the Net Interest Margin (NIM) does not generally get affected whenever the banks do prudent planning. On the whole, banks need to incorporate a short, medium and long term view on interest rates as part of their corporate planning exercise, wherein, adverse impact of a rising interest scenario can be taken care of through advance planning. Such measures would vary from bank-to-bank depending on the composition of their portfolio.

Q. What are the areas in which your bank plans to make capital investments in the coming year? Do you plan to expand your presence in the non- metro cities and smaller towns?

A. Broad-ranging fiscal and structural reforms - including reforms in the tax system, substantial cuts in the consolidated deficit of the public sector, liberalization and deregulation in the industrial sector, trade and tariff reforms, and measures to recapitalize and strengthen the supervision of banks and other financial intermediaries - undertaken since the early 1990s coupled with favorable macroeconomic trends have contributed to growing optimism about India’s long-term growth prospects. Indian banks, on their part, have appropriately addressed the objective function underlying such economic liberalization measures of the Government by extending adequate and timely credit to productive sectors of the economy. As providers of capital, banks have played a signal role in propelling the economy into a higher growth orbit.

In this high growth scenario, to attain a premier position the organization structure of IDBI Bank is being realigned through engagement of employees and fine-tuning of the technological infrastructure. IDBI Bank is investing in every aspect of its functioning with an innovative streak, ranging from products and processes to even people, systems and business partners. IDBI Bank, anyway, periodically revisits its Business model, based on the contemporary market dynamics so as to achieve/ retain a top-drawer position in the emerging financial architecture. This dynamics will ensure that IDBI Bank will earn a high share of future business growth in the country. We have already obtained permission from RBI to launch a Mutual Fund and set up an Asset Management Company (AMC). We also have plans to set up a Private Equity Fund. Yes, the Bank is increasing its footprints in Tier II and Tier III cities, which have enormous potential and will help us in our endeavour to become one of the top-5 Banks by 2012.

Q. What do you think is your competitive advantage over other banks?

A. The global banking space today is witnessing significant widening and deepening of markets as also increase in the scale of activities and number of transactions. Business is increasingly becoming global and accordingly only those firms will be successful who have a global outlook, understanding of global business dynamics and most importantly, a global business model. Innovation is going to be the key to future sustained growth. However, innovation would not be limited to products alone. Successful financial service players would be required to embed innovation in every aspect of their functioning, ranging from products and processes to even people, systems and business partners.

I must add that while product innovation gives competitive advantage to an organization for a few months, process innovation can lead to competitive advantage for the innovator organisation for a much longer period.

On our part to achieve this competitive edge, we have reorganized our Bank’s businesses around major business verticals, each focusing on a particular customer segment. This is supplemented by our cutting-edge technology and a periodic review of our business models in line with our aspirations to be among ‘Top 5’ banks.

Q. Does your bank have or plans to have any special programs for promoting financial inclusion in regard to providing the poor with greater reach and access to banking services? Does your bank have any special products or initiatives targeting the rural customers?

A. A significant challenge for the Banking system will be to promote financial inclusion, i.e. to take banking services to the bottom of the pyramid. Banks would need to expand their reach physically and in terms of products, to cater to every section of the society hitherto not part of the financial system. The inclusion of huge un-banked and underbanked population would provide tremendous growth impetus for the economy in terms of expansion of the market. In the endeavour of tapping the unbanked or under-banked population, the Bank has introduced ‘Sabka’ Savings account and mobile cash van “The Mobile Branch consists of a Kisan ATM operated on a biometric system which enable the farmers and rural people to operate their accounts with just a thumb impression. Initially, the Mobile Branch will provide banking services such as opening of accounts, cash deposits/withdrawals. Later, complete services will be offered to the rural population. The Mobile Branch visits small villages/hamlets around Satara in Maharashtra, where majority of our rural branches are located.

Q. Can you please highlight the performance and progress made by your bank in respect of extending financial and related services to SMEs?

A. The Bank continues to give thrust on increasing exposure to SMEs, which is one of the growth engine for the Bank. We have developed a special business model to serve the SMEs in India. The Bank has plans to set up 40 City SME Centers (CSCs) out of which 15 CSCs have already been opened. While CSCs are the Bank’s hubs to serve SME clusters, dedicated SME desks have been set up in several branches across the country. In our efforts to reach out to all types of customers, the Bank has been continuously developing customized products for SMEs from time-to-time. The bank has launched two new products for traders and professionals & self-employed viz IDBI Sulabh Vyapar Loan & IDBI loans to Professionals and Self Employed. We have also effectively implemented the MSME package suggested by the Government of India.