Prashant Kumar, MD & CEO, Yes Bank said investments for Sumitomo Mitsui Banking Corporation (SMBC), which has currently signed up to acquire 20 percent stake from State Bank of India and other banks, is a sigh of relief to him and his team. The question of what next after SBI has been sorted in the best possible way, he said in an interview to Moneycontrol. With respect to business, on the retail front, he said while the RIFD book should shrink by Rs 7,000 – 8,000 crore this year, concerns pertaining weak asset quality have to do with the quick flip in the retail credit cycle. Edited excerpts:
Has life changed for you or your colleagues and especially at the leadership role post SMBC’s commitment coming in?
One of the things which were continuously bothering us was what will happen after State Bank of India’s (exit). We had to find a solution to replace SBI with a strategic investor. If SBI is replaced by a private equity kind of option who (normally) have is having a short term view, it is not the best option. This deal (with Sumitomo Mitsui Banking Corporation, SMBC) has put to rest that concern. That's a huge comfort to me and the entire leadership team. This would close the entire restructuring process, as restructuring is always not in terms of coming back on the sound financial but also finding long term solutions.
What in your view are the top three selling point for SBI to market Yes Bank to a foreign investor?
Interest in Indian economy is real because the Indian economy is doing better than other part of the world. For anybody who is large in the globe, and wants to diversify beyond their own country, India is a very good story. If they are a financial institution, Indian banking space over a period of time, has shown soundness. Regulator is very strong. There is a transparency and trust. A large country like India offers a huge market opportunities. Now how many such banks are available for a foreign investor and I think Yes Bank was among the eligible bridegroom or bride. Even in an extreme difficult situation, we have demonstrated our capabilities to come back. The second favourable factor is the digital capabilities of the bank, which would be very critical for any banking institution in future. The third thing is a very well distributed balance sheet, both on the assets and liabilities side. We are not a bank where the there is a concentration risk, and I think this is very critical.
Purely from a financial lens if one is to compare Yes Bank and IDBI Bank, the latter seems to have bounced back stronger, though it has deeper NPA issues. What are your thoughts on this?
Not to take any credit from IDBI Bank and they absolutely need to be complemented for what they have done and it’s a phenomenal job, there are a few differences between us and IDBI. First is in terms of perception. IDBI bank still is considered as a government bank, right? The moment you are seen as a government bank, the immediate advantage which comes is cost of deposit, which is different from the cost of deposit of any private sector. Despite the problem they had on the NPAs, their deposit franchise was not impacted. In case of Yes Bank when there was a problem, deposits was first hit. Also, in case of IDBI, there was no issue in terms of the capital support, which was not the case with Yes Bank. . Yes. In case of yes bank, there was a issue from the capital support. Therefore Yes Bank and IDBI Bank are not comparable.
Q1 was disappointing from a loans and net interest income growth perspective. This is also the first full cycle reset we are seeing with repo rates. Are banks including Yes Bank going to take more time to adjust to rate reductions?
We think that whenever rate of interest comes down, loan growth will go up, or if the interest rate is high, there is no demand. While rate of interest plays a part, fundamentally loan growth depends on the demand. I have seen times when rate of interest was 10 – 11 percent and loan growth was also in double digits. Today, corporates have an alternate funding arrangement, so there is not as much dependence on the banks. SMEs continue to look towards the bank, and growth in this segment has been good. With retail two things have happened. Demand has been selective and banks have also been very cautious on unsecured loans in the last 18 months.
Have banks tightened the noose too much on unsecured retail resulting in a slowdown?
Some mistakes have been corrected on the unsecured side. The aggressiveness in terms of giving the unsecured loan, just for the sake of lending because banks saw a huge opportunity here or somebody is doing and hence everybody should do has reduced.
Are we in a vicious cycle where consumption is low because unsecured loans are getting tougher to obtain, or are we tightening this norms in this segment for lack of genuine interest in discretionary demand?
I would not rule out what you are saying. The same thing happened with corporate loans in 2012 – 13. There is no (real) demand, but everybody was just giving a loan. This is a learning both on the bank side as well as on the consumer side. Thirdly, there is a total behavioral change which is more aligned to consumption and not worried about the saving. We can always respond to a situation which is only a pure arithmetical thing to correct. How do we change behavioral things?
Would you consider wealth management as a stream of business to handle this change in savings pattern?
That is a good opportunity. Definitely, if such a long-term investor (SMBC) is coming on the board, and if they have a strategy, we can see what would be the strategy for the bank going forward. That strategy would be absolutely long-term, something we have not had the luxury so far.
What about the inorganic options you were looking in the MFI space?
There is no clarity on how the business would work out in the future from the delinquency point of view and from regulatory expectations. If the returns are reducing from interest margin perspective, and delinquencies are higher, everybody has to see this sector slightly different. Also, if you are having a strategic investor coming in, decisions have to be taken once they join.
What is the status of your RIFD Book and when do you see reduction of this book percolating to margins?
There will be a further reduction in the RIFD book this year by 7000-8000 crores and it would fall to below 5 percent of our loan asset by FY27.
Can investors expect a visible turnaround in retail business?
Initially we were not focusing only on the profitable asset because we wanted to have a (certain) growth. Today, we are in a position to take a call to say that we will grow only the profitable retail assets. People say our retail strategy was not very thoughtful. But it’s a very well thought strategy, keeping in mind the circumstances of that time. A bank which was put under reconstruction is also put under PCA, what would have happened to deposits. We have faced a very complex problem and have to solve the problem one by one. Had the credit cycle on the retail side not turned bad, we would not have faced this problem. It flipped very fast. But, if you see our strategy of a very well diversified loan, despite the higher stress on the retail side, it has worked well.
The word on your corporate loans side is that Yes Bank’s name is seen in very few proposals…
It's not out of cautious; this is more of a risk management. People don't give the importance to the concentration risk. Today, if any bank is facing any problem, it's only because of the concentration risk. Why I should have 25 percent of corporate book where the pricing expectation is very thin. Even within retail, there should not be a concentration risk.
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