Inside Companies: Federal Bank's main focus on SME lending

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Saikat Das
Moneycontrol.com

Along with the traditional private sector elites like HDFC Bank or ICICI Bank , Kerela-based Federal Bank , of late, has become a favoured one in the stock market. In the last one year, its shares fell 17.35% as against a drop of 27.40% in the 14-share Bankex, a barometer of banking stocks in the BSE.

Shyam Srinivasan, the managing director and CEO, had joined the bank in more than a year back with his experience in serving multinational banks. He has tightened measures to check non-performing assets (NPAs). Net NPA ratio improved from 0.74% to 0.58% in September quarter sequentially. In an interview to Moneycontrol.com, he explained how he wants to intensify focus on small and medium enterprises (SMEs).

His biggest challenge, however, is to maintain the growth momentum to attain higher milestones. The bank is still way behind the top three private sector lenders.  

Here is an edited excerpt of the interview.

Q. After spending one year, what structural changes are you bringing to the bank?

A: We are making some structural changes. For example, origination and underwriting has been separated. Now, there are two sets of specialists.

At our bank, branches are now sales-and-services oriented like meeting clients, getting business, and servicing them. On the other end, credit decision is independent of that originating business. This is how we are building a new structure.

We are developing more contemporary skill sets but yet not loosing our core strength. 

Q. What is the core strength of your bank?

A: The main strength is the conventional SME lending. Non-resident customers too add to our forte. Therefore, the strategy of the bank is to build our base more on SME business and NRI services.

Recently, we opened 66 branches in a single day. These branches are mostly in Maharasthra, Gujarat, Karnataka and Tamil Nadu. We are aiming 1000 branches by next year of which 500 will be located outside Kerela.

SME lending which forms around 29% of our loan book, stood at Rs 34,600 crore. However, if you consider mid-size companies with Rs 700-800 crore total turnover, the exposure would come around 45%. The definition of SME is pretty wide including mid-size companies.

We look at serving companies with turnover in the range of Rs 100-700 crore. We have our own skill sets and products here. We are one of the finest capitalised banks.  

Q. What prompts you to lend more in SME segment?

A: Firstly, our bank is built on the SME model. Why should we change the model? Secondly, India is a SME story. It lays huge opportunity. Thirdly, our bank has its own skill sets in SME business. 

Q. Bad loans are rising across banks. Don't you think it is a risky proposition to lend more to SMEs, not so highly rated like large corporates?

A: When I say I will grow on SMEs, it does not mean that I am going to be mindless about what is happening. Had it been the case, we would have grown by three times in last one year. But, I chose not to grow much faster. We know when and how to grow.

We have not said, tomorrow morning we would disburse Rs 10,000 crore loans. SME focus does not mean just lending. We can add more products while building healthy relations with our SME clients. I can cater to products in foreign exchange, deposits and derivatives as well. It is the kind of customers we do the best business! 

Q. Where do you see your credit growth in 2011-12?

A: We will be expanding our loans by 18-20% YoY in FY12. We are a bit carful this year for our credit growth. We have tightened our credit appraisal process. We cannot compromise our credit quality even at the cost of a little slower credit growth.

Q. How do you plan your retail foray?

A: We are now aggressive on home and gold loans. We are selling those products through our own branches and our wholly owned subsidiary FedFina, an NBFC. This will remain a focus for us in retail business. Moreover, we are offering balance transfer product on home loans after the prepayment charges are waived.

We are also open to talk to people for any strategic tie-up to expand our home loan base. There are many home loan originators who have approached us.  They will originate the loan and we will be the funding provider. We are exploring it.

Home loan is a massive opportunity in India. In the next two-three years, we might double our home loan portfolio to Rs 10,000 crore.

Q. Any overall asset quality concern...?

A: There is nothing terror like problem. However, it is will a lie to say that there is no problem. We are very watchful about our accounts. So many pains are emerging everyday, be it interest rate or something else.

We have loan exposures to power (Rs 1,700 crore) and airline (Rs 300 crore) sectors. We have lent around Rs 100 crore to the debt-ridden Kingfisher airlines via bank guarantee. In power sector, we lent around Rs 600-700 crore to troubled state electricity boards of Tamil Nadu and Rajasthan. So far, there is no problem with those two SEBs. But I think, they will talk to us soon. 

Q. Have you waived pre-payment charges from your own bank?

A: If a customer goes away from our home loan account, we will also waive our own prepayment charges. Objective is to retain the bank's customers. 

Q. Can you tell us something about your NRI business?

A: India's 7% remittances is done through us. We would like to increase it to 10%. It is a very competitive market. In the last one year, our rate of remittances growth has been one of the top 2/3 banks in India. We have seen greater inflows of NRI deposits.

Hopefully, we will open a branch in Dubai in 2012. We have applied to both the Dubai International Financial Centre (DIFC) and the RBI. Those were at early stage of applications.

Q. On savings rate deregulation?

A: There is a price discovery going on in the market. Certainly, we are watching the situation. Right now, we are not in any hurry to hike interest rates. Savings business is beyond this few percentage points hike. A customer will earn only Rs 100-200 more for his Rs 1 lakh balance in a year. Higher rate is not the only criterion for shifting accounts. We will accelerate our efforts on customer service.

saikat.das@network18online.com