Bank of Baroda MD pitches for multi-channel strategy

Informist, Friday, Jun 30, 2023

--Bank of Baroda MD Chadha: PSU bks must have multi-channel strategy

--Bk of Baroda MD: PSU banks need to cut dependence on branch network

--Bank of Baroda MD:Pandemic gave opportunity to hasten changes in ops

--Bank of Baroda MD: Board to review business correspondent strategy

--MD Chadha: Bank of Baroda aims to grow 2% more than industry

--Bank of Baroda MD: Repricing of deposits to continue in FY24

--Bank of Baroda MD:Deposits repricing to exert some pressure on NIMs

--Bank of Baroda MD: See moderation in growth of international book

--Bank of Baroda MD:Expect to maintain NIMs at current levels in FY24

--Bank of Baroda MD: Rising retail loan share to support NIMs in FY24

--Bk of Baroda MD:Corporate loan demand to remain benign for a few yrs

--Bank of Baroda MD: No need to raise fresh capital in near term

By Richard Fargose and Kabir Sharma

MUMBAI - State-owned banks should identify their weaknesses and adopt a multi-channel strategy to reduce dependence on the branch network, says Bank of Baroda Managing Director and Chief Executive Officer Sanjiv Chadha.

"I think as long as you can have a multi-channel strategy, not being over-dependent upon branches, I think it is possible again to grow faster," Chadha, who is set to hang up his gloves today, tells Informist in an interview. "Because in today's world, you cannot wait for the customer to come to you and typically, a branch strategy is based upon the customer coming to you."

Chadha credits the bank's internet banking application bob World for being able to expand business without expanding the branch network. Bank of Baroda currently has around 8,200 branches, almost 14% less than three years ago.

Chadha, who took over as Bank of Baroda's managing director and chief executive officer just before COVID-19 hit, feels the pandemic was an opportunity to accelerate change, something that would otherwise have taken five or 10 years to implement.

"Because of the uptick and the usage of bob World, today we have 30 mln customers. It has meant that we have been able to expand our business without expanding our footprint," he says.

Chadha also attributes the growth to expansion in the network of business correspondents in the last three years. The country's second-largest state-owned bank has expanded its business correspondent network from about 18,000 to 50,000 over the last three years.

Following are edited excerpts from the interview:

Q. Many brokerage houses say Bank of Baroda's business model is as competitive as major private banks. Please highlight some of the key measures implemented during your tenure.

A. From my perspective, even if you want to look at the last 10, 15, 20 years, or more, Bank of Baroda has had a very special place in the public sector bank category. Even in terms of performance, say 10-12 years back, it was very good, pretty much compared to the private sector. It is a fact that as the environment changes, we need to consistently enhance things to remain competitive.

When (P.S.) Jayakumar came in, he brought in a lot of changes. He brought in best practices from the private sector. I think that's something really important. For instance, accessing talent from the market, that was something he started. This is a time when a lot of services are getting outsourced. Therefore, having a captive company for shared services, that's something that we started.

A lot of things happened. I think what we have been able to do in the last few years is to really take those things forward and get some kind of results from that. What we were able to do in the last three years was to see how technological excellence could touch customers and transform customer experience. I think that's where bob World was very important. That is something which, to my mind, is almost foundational in terms of the success of the bank.

First, it improved customer experience. Two, it meant that customers, particularly when they were not able to come to branches during COVID, actually had a channel that was very effective to transact. And third, because of the use of bob World, today we have 30 mln customers. It has meant that we have been able to expand our business without expanding our footprint. That's something which to my mind was very, very powerful. If you want to look at the bank's results, over the last few quarters, you'll find that our costs actually have gone up much less compared to competitors. That's because today, five times as many customers use bob World as those who come to our branches. Therefore, you can expand business without expanding the physical footprint.

In the third quarter (Oct-Dec) of last year, if you see the figures, the industry's cost went up by 16%; ours by 8%. That's something which is an enduring advantage for the bank.

The second part was in terms of talent. I think the bank has been able to very successfully on-board talent from almost every other bank in the industry. Our chief risk officer, chief digital officer, and chief financial officer, all are very seasoned industry professionals. I think that's something which is enormously powerful because that has allowed us to build new businesses, which were never really the strength of the bank.

I think a lot of companies actually brought in consultants to execute something like bob World. This was done almost entirely in-house, that's something which was a great success. I think those are the kind of things that we have added. But at the end of the day, what you measure results is in terms of numbers, and I think all of this has come together in the last year, in terms of numbers, where growth in particular has been very encouraging for us, considerably faster than the industry.

And, within the overall growth parameters, we find retail growth has actually been an outstanding performer.

In terms of a business model, I think the proof of that really is the fact that we are actually able to grow faster. We are able to improve our margins, and also have very good asset quality.

Q. The bank navigated the COVID-19 crisis with you at the helm. Please share your experience.

A. I think every crisis is also an opportunity. The pandemic was an opportunity to accelerate change, which otherwise would have happened over a five or a 10-year period. If the pandemic had not been there and the imperative of reaching out to customers at their base had not been there, then probably the roll-out of bob World may not have been as fast as it was. The bank has actually almost transitioned into what it might have in five to seven years.

Similarly, in terms of our rural customers, when DBT (direct benefits transfer) had to happen, we realised the value of BCs (business correspondents) because customers could not come to branches. So, we expanded our BC network, which moved up from about 18,000 to 20,000 to about 50,000 over three years. This meant that in terms of our outreach today, it is much wider compared to before.

It also meant that we have been able to move transactions from branches to BCs. It has a two-fold advantage. One, you can service your customers better and at their place of residence or work. The other is you have freed up capacity at branches for other, more value-added stuff. That is why although our branch network is today smaller compared to what it was three years back, we have been able to expand business very, very aggressively. So, in so many ways, a lot that has happened is actually because of COVID-19. The pandemic actually gave you the impetus to do things in a different manner, and of course, credit to the team and the bank that they had the foresight to capitalise on the opportunity.

Q. So bob World was completely developed internally?

A. Yeah. It was developed by our internal team. Of course, with everything that you do in technology – you use fintech, and you use partners – but it was pretty in-house.

Q. Going ahead, do you plan to add more business correspondents?

A. I think the mandate from the board is to take the proportion of BCs from two BCs per branch to about five. So, that is something which we have accomplished. So now, the board will review these and see what we can do as we move forward.

Q. What is the unfinished agenda after your three-and-a-half-year leadership stint at Bank of Baroda?

A. I think there will always be such things. Banking is such a place that you can always find 10 things to do. But I think the good part is, and that it is something very fortunate, that we have (Debadatta) Chand taking over from me, who has been a key member of this team for the last couple of years. So, I think the element of continuity should be able to address whatever challenges come as we move forward.

Q. Private banks are gaining market share from public sector banks. What steps should a large bank like Bank of Baroda take to gain share from its weaker public sector peers and NBFCs? Is there a plan for that?

A. I think effectively, when you say increased market share, it means you're growing faster than the market, right? I think we have some cause for satisfaction. If we look at last year, the bank actually has been able to grow faster than the market, both in terms of deposits and loans When it comes to retail loans, we have actually grown by over 27% – higher than the market. That means that even within the PSU bank context, it is possible to gain market share as you move along.

I think how you need to do it is to see how you can identify relative areas of weakness and see how you can build capabilities there. If you look at the last two or three years, we had some challenges in home loans, our car loans were growing very quickly, education loans were growing very quickly, but home loans were 70% of the retail market. We were able to build more capabilities, direct sales, and team. bob World was a big help, a large proportion of leads actually came from bob World. I think as long as you can have a multi-channel strategy, not being over-dependent on branches, it is possible to grow faster because in today's world, you cannot wait for the customer to come to you and typically, a branch strategy is based upon the customer coming to you.

The other channel is to proactively go and reach out to customers. I think that is something we need to recognise. I'm not sure which bank you have an account in, I'm sure you do not visit the branch everyday. Maybe not every week, maybe not every month, and maybe not even every year, right? That is the world we need to recognise.

Q. Do you see the need for more consolidation among PSU banks?

A. You can argue that size is no longer the sole determinant of success. But it has its advantages because when you have scale, it means you can make investments in technology, right? But in many ways, even technology is being democratised.

When we look at, for instance cloud or software, the scale advantage you traditionally had is not necessarily overwhelming, which is why you find that there are some small business banks that are doing very well.

So, I don't think we can necessarily equate size as something that is necessary for success. In fact, you can argue that the lack of size gives you the nimbleness that size won't give you. Again, it's more a question of making sure you take advantage of the opportunities you have. Your advantage may not necessarily be size, it could be nimbleness, it could be agility, or the speed of decision-making.

Q. Recently, Reserve Bank of India Governor Shaktikanta Das spoke about gaps in corporate governance of banks. What is your view on this? What are the main constraints in taking governance at PSU banks on a par with private banks?

A. I think it's very, very important. And, from our perspective, I think we have been singularly fortunate. The bank actually has a great board and a very distinguished non-executive chairman. I think that's something which is very important.

One of the risks any bank carries is what you might call a 'super CEO'. Again, that's where the power of the board and the eminence of the chairman become very important.

Q. What is your target for deposit and credit growth in 2023-24 (Apr-Mar)? Which segment will be the focus area? In terms of asset quality, which segment should be monitored this financial year?

A. Internally, we have always been talking about having growth that is 2% better than whatever the market growth is, and that's something we have delivered last year, and I believe we should continue that as we move forward.

Q. The industry's net interest margins have been at record levels in the past two quarters. Now, with interest rates at a peak, what is your outlook on these margins for 2023-24?

A. I think NIMS are driven by cyclical factors, like the lag effect between repricing of deposits and advances, there will be moderation. In fact, you can argue that repricing of deposits will continue to some extent this year as well. It will obviously exert some pressure on margins. It really depends on the structure of a balance sheet.

For us, since about more than half the balance sheet is corporate and most of them are largely one-year MCLR-linked, repricing of the book will happen over the next 12 months. Apart from that, I think we believe there will be moderation in growth of the international book. Last year, the international book grew 30%, compared to the overall growth of 18.5%%.

The international book has NIMs that are lower and so, if it's a larger proportion, NIMs come under pressure. So this year, we expect international to grow on a par and that should also help protect margins.

Third, the proportion of retail is increasing for us every year, and that again has better margins compared to corporates, where margins have been under pressure.

And fourth, within retail, unsecured retail has grown very quickly last year. That, too, should help protect margins.

So, our overall guidance has been that we expect to be able to maintain margins at current levels in the next year.

We had a 3.3% margin for the full year. Our guidance is that we will be able to protect those margins.

Q. According to reports, the RBI has expressed concern over rising unsecured loans with banks, mainly the credit card book. What is your view on unsecured loans?

A. From our perspective, the credit card business does not sit within the bank; it is outside the bank. So, growth of the credit card business does not impact the bank's unsecured portfolio at all. Second, we grew our unsecured business only after bob World came in because that is our cost-efficient way of doing unsecured loans. We, therefore, grew from a low base.

Today, even overall retail is something like 22% of our balance sheet. In some banks, it is as high as 50% plus. In those banks, obviously a disproportionate emphasis on retail can have implications for the future. Similarly, for us, although unsecured personal loans have grown fast, they would probably be just about 2% of the overall portfolio. It's a relatively small piece.

Q. Is the current level of capital sufficient for the bank to manage credit growth over the next two years?

A. We have about 16% capital adequacy ratio despite having 17-18% growth in loans. We ended the year with a capital adequacy ratio higher than what it was at the beginning of the year, which means even this kind of growth can be supported by internal accruals. This year, the consensus is that there will be some moderation in the growth of loans. If the growth in loans is a bit lower and profitability continues to be at this level or better, there wouldn't be any reason for us to go to the market to support growth.

Q. When do you think the RBI will start cutting rates?

A. I think it will probably be in the last quarter.

The RBI has obviously made it very clear that its takes the 4% (CPI inflation) target very seriously, which means rate cuts might be a little further down the year. But, to my mind, inflation seems to be under control.

In terms of the international environment, I think it should probably improve towards the end of the financial year. We should see some action on that.

Q. The consultation paper on expected credit loss is out. What is your opinion on that? What timeframe should be provided to implement this norm?

A. The RBI has probably only indicated that it will provide a five-year period to absorb the impact, which I think should be adequate.

I have gone on record to say that we are currently in a very benign corporate credit rate cycle and we believe that this benign cycle is likely to continue for a few years. End

Edited by Avishek Dutta

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