‘There is pressure on deposit growth because inflation is high’

After breaking ties with the US-based Principal Financial Group, Punjab National Bank (PNB) is all set to appoint a consultant who will help the bank make a foray into the insurance business. KR Kamath, chairman and managing director of PNB, tells <i>DNA</i> about the three options which the bank is currently exploring for an entry into the insurance space. Excerpts:

Your bank has a presence in mutual funds and in the recent past you had set up a committee to evaluate the prospects of entering the life insurance business. What is the status on that?
We had two tie-ups with the Principal Group in the US. One was for forming a joint venture in the life insurance business and the other for a broking firm. Since they did not take off, we entered into a memorandum of understanding with them to sever the joint venture.

These papers were submitted to the Insurance Regulatory and Development Authority (IRDA) and the Reserve Bank of India (RBI) for approval of the restructuring.

Once we get the regulatory approvals, we will take a view on what has to be done for the insurance in the future. Before that, we are looking at appointing a consultant to help us out in taking a proper decision on the way forward in the insurance business.

There are a lot of opportunities available in the market and we are yet to make up our mind. The future courses are, firstly, we can tie up with a partner and get into the creation of insurance products which will take its own time.

Secondly, we can tie up with one of the existing insurance products firms and this may not take much time. Lastly, we may restrict ourselves to a corporate agency which hardly takes time.

Since the way ahead is not very clear, it will evolve as we go along. We will now call for EoI from different people who would like to get associated with us and look at their proposals. After that we will decide which will suit the bank the most. We should be in a position to take this decision by the end of this fiscal.

What are your global expansion plans?
We are setting up a subsidiary in Canada. We also have to upgrade our Norway representative office in to a full-fledged branch for which we have got approval from the RBI, but now we are waiting for an approval from the central bank in Norway. We are buying a bank in Khazakistan called JSC Dana Bank. We have a representative office in Shanghai and we were trying to upgrade it into a full-fledged branch. But when the (financial) meltdown happened, we decided to take a view later. Besides that, we had a representative office in Dubai, which we turned into a full-fledged branch at the Dubai International Financial Centre.

Now we have an approval to open a representative office in Australia. As far as buying a bank in Khazakistan is concerned, we have done the due diligence and sought the regulatory approval from the central bank of Khazakistan and we are moving forward. We hope to complete this buy by December end. This costs less than $25 million. In Khazakistan banks are under some pressure. This is the time to buy them because the deal comes cheap. We will reestablish these banks and this will mark our entry into the Russian continent.

Punjab National was the first bank to announce a hike in the base rate at the start of this quarter. How has been the credit growth after that?
Before we increased the base rate, we had increased the deposit rate. The deposit rates were increased even earlier. That had an impact on margins, so we increased the base rate. After that there was one more hike by the RBI on policy rates and for that we have not taken any action. Therefore, the base rate increase was a right decision we had taken. After the increase in base rate, credit growth did not get impacted adversely.

Despite the series of hikes in deposit rate, growth continues to be sluggish. Do you think the banking system will be able to match the RBI’s deposit growth target of 18% this fiscal?
There is a pressure on deposit growth because inflation is high. The returns of deposits are not keeping in tune with inflation. So the depositor will look for alternative sources where they can maximise their returns. That is why in the recent past banks have revised their deposit rates.

We are trying to bring the customer back. If inflation is controlled by March, I think deposit growth will happen. It is too early for us to say if the RBI will change the deposit growth target. I do not think the RBI will take an immediate stance.

But I think the RBI is very closely observing things. In case the deposits do not pick up and the credit demand picks up, then probably we will have to increase the rates on deposits. But banks may not be in a position to increase the rates only on deposits and keep quite because that will put a pressure on their margins.