Our bank is institutionalised, not family-run: YES Bank MD & CEO Rana Kapoor

A lot has changed in the first five months of this fiscal, particularly in the last three months of the new government. Business confidence, in terms of conviction and message has dramatically changed the economic environment. Industries like FMCG, pharma, IT, and M&As within the domestic sector are seen as game-changers by bankers and economists. YES Bank's MD & CEO Rana Kapoor is all pepped up for a gear-shift under the new regime. "But the bigger worry is for these (initiatives) to translate into kinetic energy or what we commonly say, green shoots," he tells OP Thomas in an interview. Excerpts.

What is your view on the domestic growth prospects?
The new government has undertaken several steps over a short span to improve the business climate in a bid to provide a congenial environment for investment revival. The FY15 Union Budget was presented with an aim to arrest the weakening growth momentum experienced and nudge the economy forward by improving the quality of government expenditure. It announced critical decisions such as increase foreign direct investment (FDI) cap in insurance and defence sectors from 26% to 49%, a10-year tax holiday for power companies, along with incentivising banks to offer long-term funding. Since the first quarter of the current fiscal, we have seen a nascent, albeit meaningful, turnaround in leading growth indices, such as core output, IIP growth led by automobile production and PMI indices. As such, I expect growth momentum to strengthen over the next two quarters, with GDP improving close to 6% in FY15, compared with 4.7% in FY14. The positive thrust to long-term growth is expected to emanate from structural reforms. The Modi government has displayed its intent of reforms aimed at easing of supply side impediments by establishing fuel contracts for power projects, creating a regulator for natural resources, re-assessing the land acquisition bill and investing in human capital among others. These, in my opinion, will allow India to shift growth gears to 8%+ growth trajectory in the coming years.

Which sectors do you think will need immediate attention?
The growth slowdown over the last 2-3 years had its roots in the infrastructure sector besides headwinds to the mining sector. These sectors require immediate attention as they define the sustainability of economic growth while also having enormous employment underpinning. While the GoI and the Reserve Bank of India (RBI) have taken steps to revive infrastructure growth, the progress so far has been modest. The public-private partnership (PPP) based approach needs to be tailored as per the current environment. A more focused initiative with emphasis on improving contractual arrangements with the private sector, reducing systemic advantages of unreasonable bidding, and allowing greater FDI participation would be crucial.

When will we witness the benefits of falling interest rates and growing economy?
An economic backdrop characterised by increasing growth and falling inflation is a desirable sweet spot. A movement towards this spot would encompass expansion of capacities, introduction of structural reforms, adherence to fiscal discipline and improvement in quality of governance. This will improve prospects for investment led growth while creating sustainable opportunities for job creation, curb inflationary pressures and vastly enhance India's perception among its external stakeholders.
While the economy has already started depicting improvement in the growth-inflation balance, the mending process is likely to take some more time. As revival in brownfield investments give way to a spurt in greenfield investment activity, structural pressure on inflation will ease further. With persistence of policy in the right direction, I am confident that India can move towards a sustainable regime of high growth and low inflation (resulting in falling interest rates) after one year.

Which sectors would be the first to kick off and create jobs, once rates starts declining?
Discretionary spending on consumer goods and sectors like automobiles and housing should offer first signs of pick-up in demand once interest rates start to decline. Such a kick-off would then end up benefiting banking and finance companies which fund such consumption. If the declining interest rate trajectory is sustainable, infrastructure and capex related sectors should also show some positive impact, where long-term cost plays an important role. Having said that, ultimately interest rate cut should bring in good times for everyone. Lower rates would allow companies to expand capacities, increase in demand for goods would boost profitability of producers and a productivity led fillip to wages would create multiplier impact for the entire economy. In terms of employment, as consumer goods sector is expected to be the front-runner as and when the cost of borrowing comes down, I believe hiring activity should also initially gather pace in similar areas vis-a-vis electronics, hospitality and automobiles.

Since 2011-12, banks have sharply hiked loan rates, especially home loans. Have defaults in the sector been on the rise?
Overall as a system, all consumer loan trends on delinquency has been well under control, except for commercial vehicles and construction equipment (which some banks classify under retail assets). Since there has been abundant caution in consumer loans including home loans post 2008 crisis across all banks and hence as a system, the LTV (loan to value, specially for home loans), credit underwriting standards based on cash flow, ability to repay etc has been more cautious. Also when LTV/ tenor is conservative, even if there is rate increase, it generally gets adjusted with tenor rather than EMI increase and hence does not impact cash flow/EMI payments. However, if there is a continuous and or abrupt rise in IRR (internal rate of return), then tenor adjustment is not possible, which leads to higher EMIs or defaults which definitely is not the case in the last two years. Also, as property prices are expected to rise now, general sentiments are positive and hence effective LTV for home loans are expected to fall further (as unlocked value in LTV denominator in terms of perceived realisable value should go up) and that plays a major role among banks and customers to address such stress, if at all there is any concern. Thus in all respect, I don't see stress or default in consumer and home loans right now. In fact as denominator of retail loan book is increasing rapidly in banking system currently, and with a slow inflow on numerator on delinquency from conservative retail loan booking 2008 onwards till 2013, the NPA trends are artificially looking good, and we will have a reality check in next 2 -3 years for any bank growing rapidly retail book, in case GDP growth and wage inflation to support that growth disappoints. With the government taking several action steps, that difficulty looks quite unlikely right now or in next 18 months as still retail underwriting in the banking system is conservative, compared to 2004-2008 era. CV/CE cycle has not been good though and reason for that is economic cycle and other governance and policy related issues, which is well known. Its expected to only improve from Q4 of this fiscal, with demand uptake expected with gradual pick up in power, coal, mining, exports, transportation and economy.

How did YES Bank sail through the economic meltdown?
We were only four years old in the 2008 crisis, then came the Euro crisis followed by three years of sluggishness in our country. It was a learning curve where we've got the seasoning and risk architecture and risk management. We grew in sectors like agri, life science, education, healthcare, renewable energy, transportation and logistics. Within infra these- transportation and logistics outperformed. We were de-risking in power, real estate, exposure in capital market, part of our exposures in NBFCs. We were able to preserve our capital by syndicating loans. Once we saw a ripe window, we raised QIP of Rs 3,000 crore (on May 30, 2014). As a result CAR is well beyond 18% given the capital strength and good quality assets and effective liquidity management our CASA has been growing at 3.5-4% year-on-year growth.

What is your growth target for the year? Any new products on the anvil?

There should be a modest upside for consumption and investment in fiscal 2015, resulting from new government formation, with further potential of growth in fiscal 2016 on back of improving investment and exports. These factors combined should drive banking sector profitability and growth. We expect growth of 20-22% in advances and similar growth in balance sheet. Incrementally, we believe that 30-40% growth in advances should come from retail/SME and MSME segments, going forward. We will continue to grow our low-cost saving account deposits at higher pace as we believe the benefit of investment in employee and branches in past two years will start to kick in now. We believe that the CASA ratio should be above 25% and total retail/granular deposits should be more than 50% in next 1-2 years. We have also launched our brokerage business which should begin to scale this year. We are also targeting affordable housing sector and will leverage the infra bond issuance.

What about future plans?
We have the skills and the agility. Scalability will come when the country shifts into top gear. We have a brand that created resonance. Our average age of employees is 30 years.

What about attrition?
The value lies in the intangibles. YES Bank has converted itself to an institutionalised bank and is not family run. We have 10 directors on board, of which 8 are independent. The DNA of the bank is that it's the professionals' bank of India. The genetics is of being an owner-manager-partner that has led to an outstanding track record of low attrition in key management. This to me is the true entrepreneurship India will desire in the time to come. We will be the Infosys 'plus' on banking.

What space (lending) YES Bank is focusing on in the near term?
As mentioned before, the bank is consistently focusing on building scalability and granularity through a robust branch banking model. YES Bank believes in achieving growth while maintaining high standards of asset quality through best risk management practices. The bank is also increasing its focus on SME, micro SME and retail assets. With the expected uptick in the macro environment, the bank is also well positioned to grow its lending book, especially for the retail and SME sector, which are expected to be important growth drivers for us over the next three years.