IndusInd Bank MD and CEO Romesh Sobti feels the worst on costly funds is behind and things should start improving from the first quarter of next financial year.
In an interview to CNBC-TV18, he said the corporate side of the loan book performed better than expectations.
“Our restructuring book remains small, around 31 bps of total, we do not see anything large blowing up in our face on the restructuring side,” Sobti said, adding he expected the restructuring book to remain stable.
Sobti expects net interest margins for this quarter to be on the same lines or slightly better than those for the December quarter.
“The stressful part in cost of funding is behind, cost of deposits have started to come off, liquidity (in the system) too has improved, there should be more relief going forward,” Sobti said.
Around 35% of IndusInd Bank’s funds comprises of wholesale deposits.
The cost of wholesale deposits had surged in July-August last year when the RBI tightened liquidity to protect the rupee. Since then wholesale rates have been gradually easing. Sobti expects wholesale rates to be slightly cheaper this quarter. “A slight improvement (cheaper funds)…but not very large, but we are on the way to more relief on the cost of funds,” Sobti said.
Below is the edited transcript of the interview to CNBC-TV18.
Q: The obvious question is non-performing loans (NPLs). What led to that 10 bps increase in NPLs - that is not a great deal but more importantly your statement that savage cuts in the plan expenditure in January-March quarter could worsen the NPLs scene for all banks - aA bit on both.
A: To keep the NPA piece for IndusInd Bank in perspective, the point is that the tick up in our gross NPAs was 7 bps and all the parameters still look low. Our net NPA is 31 bps, our restructured book is 31 bps and the credit cost came out slightly lower than the previous quarter which is 12 bps. So, nine months going we have a credit cost of 36 bps. This perspective needs to be kept in mind. For us, we have seen the worst and the corporate side of the book have behaved much better than we thought and a slight uptick happened on the vehicles.
Q: It is just that it’s a blue-blooded bank which is reporting higher NPLs even if it is 7 bps. Complete your argument on commercial vehicle (CV) space and then give us an idea of how things are panning out. Will it look worse next quarter is the big question?
A: The numbers given the market situation are sound. The CV space has seen little uptick there but we have seen the worst and going forward we expect stability there and from Q1 of next year we will see improvement as well.
Regarding the non-release of funds from government quarter and the impact they are having on the banking system is a well-known fact that the slowdown there has hurt. We have seen small, large and medium construction contractors suffering as a consequences of that and that is a worry in the system as well as a whole that if that continues then the stress in the system will only increase and you heard many bankers talk about that in the past few months.
Q: The market has been unforgiving with many of the private sector banks because of how perfect the track record has been in the past but coming to the point you were making about the possibility of liquidity getting affected because the government perhaps clamping down on payments, some of your peers like ICICI Bank and Axis Bank etc have already revised their restructuring target higher in anticipation of this. Would you do the same and what can we expect from IndusInd Bank in terms of restructuring going ahead?
A: Our restructuring book is going to remain pretty small. We are at 31 bps totally. We do not see any large things blowing up in our face on restructuring side. We have some small accounts, which are not going to materially impact on the overall basis point in terms of restructuring. So, the book is stable.
Q: How is Q4 going to be for you in terms of NPLs. The plan expense cut is one big bad part of the picture but if you looked at the Index of Industrial Production (IIP) number, you have looked at the trade numbers, both imports and exports especially non-oil imports down, there is stress already even without the plan cuts coming. So, how will your NPL picture look?
A: I think individual books are going to behave differently so while nobody is covered with Teflon and that is why the blue-blooded guys also shows 7 bps uptick in NPAs. our book is stable.
We may see slight improvement as well and what we monitor is the credit cost and we do not give guidance here but our credit cost was at 60 bps and nine months have shown 36 bps. So, we are going to come in well below 50 bps overall.
Q: A word on your margins as well as you head into the next couple of quarters or in the New Year because by and large your margins have been held quite steady at that 3.5-3.6 percent mark but with the way the economy is moving, with the way cost of funds are moving, is there a threat of you not being able to hold on to these margins?
A: I think we have seen the most stressful part in the cost of funding slightly behind us now and while there were repo rate increases, cost of deposits has come off. So, if anything, there should be slightly more relief but liquidity has improved as consequence of the large foreign currency non-resident (FCNR) flows that came in. We also got a small part of that, so that has improved our liquidity as well. So, I would imagine that for the quarter coming, at least stable or slightly improved interest margins.
Q: How much of money comes through wholesale funding?
A: If one looks at total funds, then wholesale will be about 35 percent of our total funding now.
Q: How will the cost of that move in this quarter? Is it that you are going to get it cheaper than last quarter or will it be more expensive?
A: I think it should be slightly cheaper because the curve across 30 days to one year has slightly eased off and there are other sources of money also available on funding side, foreign currency funding etc. So, I would imagine a slight improvement in the cost of funding, not very large but you are on the way of some more relief on the cost of funding overall.