'The long-term plan of the bank is to emerge as a truly international bank'

With its 1999-2000 net profit of Rs 5 billion being the highest for all public sector banks, the Bank of Baroda (or BoB) is thinking big and nursing ambitious growth plans.

These include technology upgradation in 600 branches across India and introduction of e-banking solutions, involving investments close to Rs 4 billion over a two-year timeframe. A public issue of equity is not ruled out.

What, however, has captured the market's imagination is the bank's decision to foray into insurance at the earliest. Its reflexes to market forces are seen as quicker than those of the Big Daddy among public sector banks, the State Bank of India.

BoB's chairman and managing director P S Shenoy believes public sector banks will not only hold their own in the liberalised marketplace but thrive against competitors. In this interview with Y Siva Sankar, he delineates the bank's forward-looking initiatives.

When will BoB launch its insurance venture?

We have already initiated all the processes required to launch the insurance business at the earliest. The board of directors has met and approved the decision to enter both life and non-life insurance business.

Whereas in the life insurance segment, we shall be writing/manufacturing the products and distributing them as well, in the non-life insurance segment, we propose to only distribute the products of other reputed non-life insurers.

A consultant has been selected for advising BoB on its foray. Potential partners, both domestic and international, for BoB in the insurance venture are being contacted. The application process to the Reserve Bank of India has also begun. We hope to launch the business before the end of this financial year.

Who is the consultant?

DSP Merrill Lynch, a reputed Indian investment bank, has been retained by BoB after a transparent selection process.

Who are the partners?

The consultant selected by BoB to advise it on its insurance foray is currently negotiating with some leading foreign insurance companies on behalf of BoB to finalise the partners.

Some domestic companies have also expressed an interest in sharing the equity with BoB and their proposals are being appraised currently.

What would be the equity structure?

The IRDA (Insurance Regulatory and Development Authority) Act requires that any new life insurance business be started with a minimum capital of Rs 1 billion and the RBI rules require banks to limit their equity stake in an insurance venture to 50 per cent normally.

The IRDA also states that the maximum stake that a foreign insurer can have within an Indian insurance business is 26 per cent. Within such guidelines, BoB shall be limiting its equity stake in the business to a reasonable level only.

There shall be a foreign insurance company and the remaining equity might be shared by another bank or some private investors. The final equity structure is still being finalised in conjunction with its consultants.

What kind of services would the proposed insurance company offer?

The BoB insurance company shall offer regular life insurance policies initially and then gradually, based on market surveys, launch a series of new, innovative savings-cum-investment insurance schemes specially aimed at different income groups and socio-economic classes.

How would BoB acquire insurance expertise to run the business? Do you foresee any scope for synergies between insurance and banking?

The IRDA requires minimum qualifications and practical training for different categories of staff in the insurance venture. BoB will be setting up a separate insurance company, all the staff of which shall possess this required training.

Apart from this, initially the foreign insurance company shall be the partner providing insurance expertise and the training to the joint venture's Indian staff, while BoB shall provide its vast retail infrastructure as a distribution channel for sale of the insurance products.

Yes, there is a vast scope for synergies between banking and insurance. Globally, the shift has been towards the Bancassurance model -- the concept is that the sale of insurance and investments products by banks should be a fully integrated addition to the core banking product line -- with more and more banks entering the insurance business.

Firstly, both are financial services and target at the savings of both small and large investors. There is an increasing focus of individuals towards higher returns from their savings products and this is where innovative insurance products can fill the gap. Thus, there are vast opportunities to cross-sell insurance products to its retail banking customers.

Later, there will be ample opportunity for BoB to sell its banking facilities to its new insurance customers also. Besides, the same distribution channels can be used for servicing the targeted segments for both businesses.

What kind of targets have you set for the insurance business? How will BoB gain from its foray into insurance?

India is the world's second most populous country. However, it has only 0.34 per cent of the world insurance market. India is also the largest amongst the few remaining countries worldwide, where insurance is still under state monopoly.

While average expenditure per capita on insurance in the USA in 1997 was US$ 246 for life, it was only US $ 7.6 for India and this hasn't improved significantly till date.

Hence, we believe that there is a large scope for growth in the insurance market in India. BoB targets being a leading insurance player in the Indian market, once all private players start operations.

Firstly, BoB as a financial services group will be increasing the breadth of products and services it can offer to its existing and new clients. BoB can better utilise its retail banking infrastructure for selling insurance-related products also, thereby increasing the efficiency of its existing operations.

As I said earlier, BoB will be able to increase its client base due to cross-selling opportunities between the insurance and banking clients. This will further increase the strength of BoB as a financial service conglomerate of India.

Finally, BoB shall be earning revenues as commissions by selling insurance products.

BoB is reportedly eyeing a stake in a finance portal. How will this help your bank?

The Internet space is presently full of good ideas in the finance sector with more coming up. Our belief is that these finance-based portals are in various development stages and there is space for quite a few of them.

The successful portals need to have a business model which is robust, flexible and scaleable. Ultimately, a few major ones with a stable revenue model are likely to stay and grow with the market.

We have not gone into any such tie-ups till now. But we are watching the sector closely and would take the necessary steps in the future. If the markets were to mature and if we see some value coming out of our investment, we may consider looking at these opportunities at that point in time.

What are your short, medium and long-term future plans?

In the short term, BoB aims to focus on retail lending, integrated treasury operations and better asset liability management. The business plan is geared to a 20 to 25 per cent increase in operating profit and 30 to 50 per cent rise in net profit. We are aiming at one per cent ROA (return on assets) with a 3.2 per cent net interest margin.

In the medium term, BoB wants to prepare the organisation for e-banking and e-commerce. The focus will be on organisational restructuring and right-sizing and networking of all important centres of the country.

The comprehensive risk management project taken up by the bank will also be fully operationalised in about two years' time. We are also focusing on forays in insurance, capital market related products, investment banking and payment/fund mechanism transfer services. The necessary groundwork is already underway.

With these strategic steps, the long-term plan of the bank is to emerge as a truly international bank with global resource planning and global best practices. Our vision is to enhance the shareholder's value by becoming a totally customer-centric, full-service, universal bank.

With an average ROA of 1.5 per cent and capital adequacy of minimum 12 per cent, BoB aims at risk-adjusted return on capital of a minimum 20 per cent by 2005.

The long-term strategic plan is being finalised with total involvement of the board of directors, top management and commitment of all employees of the bank.

Money

Interviews

Tell us what you think of this interview