Yes Bank’s Managing Director Prashant Kumar is confident of a 10 basis-point boost in return on assets (RoA) for FY25, led by gains from a priority sector loan product, as the bank addresses issues around profitability.
“At Rs 44,000 crore (which was the peak outstanding in Rural Infrastructure Development Fund), the impact on our RoA is something around 35 basis points. Now, if 25 percent is coming down, there will be an upside of 10 basis points on the RoA,” Kumar said in an interview. In the June quarter, the bank’s RoA stood at 0.5 percent, and its net interest margin (NIM), a measure of a bank’s profitability, was at 2.4 percent.
While Yes Bank ranks sixth among private lenders by assets, with Rs 2.29 lakh crore net advances, its net interest margin (NIM) remains the lowest among the top 10 private banks.
Kumar cited the shortfall in the bank’s priority sector lending (PSL) shortfall as one of the major reasons for low profitability. “That’s a huge drag because 11 percent of our assets are in the way of RIDFs where there is a negative carry on interest which is about 2-3 percent of an impact,” he said.
Priority sector lending (PSL) has been a persistent weak spot for Yes Bank. The Reserve Bank of India guidelines require banks to allocate at least 40 percent of advances to priority sectors, such as agriculture, small businesses, education and low-cost housing.
Yes Bank has fallen short of the priority sector lending targets, prompting it to bridge the gap by investing in RIDFs. These instruments carry a relatively low yield compared to other loan products and hence impact banks’ profitability. Just like a loan book getting repaid over a period, RIDFs also have a maturity tenure where the amounts invested are returned to the bank.
To address PSL shortfalls in previous years, Yes Bank expanded its RIDF book until FY24. “FY24 was the first full year where we have met all the requirements for PSL. That resulted in no demand this (fiscal) year,” he explained. “Last year, we had to place around Rs 18,000 crore into the RIDF fund. Today, we have reached a situation where there is no shortfall. There would not be any additional requirement this year (FY25) and going forward”.
In FY25, Yes Bank is expected to receive 25 percent of the outstanding RIDF book on maturity. “Out of Rs 44,000 crore, which happened in FY24, Rs 11,000 crore would come back to us in the current financial year. The remaining 75 percent would come back to us in the next and so on,” Kumar said. This inflow from PSL bonds is expected to boost Yes Bank’s RoA by 10 basis points in FY25. Going forward, Kumar said, Yes Bank will “ensure that there is no additional demand”.
Kumar also pointed out that the profitability is low as Yes Bank isn’t operating in high-yielding assets. “If you compare Yes Bank with the competition banks of similar cost of funding, they would either have a large MFI (microfinance institution) group, which may be 10 percent of their total assets or some other businesses. Building those kinds of portfolios takes time, and we also need to develop capabilities such as distribution networks, risk analytics, credit underwriting and collections. If you enter those areas without building those capabilities, it will come back to (hit) you. Our intent is to enter better-yielding, not very high-yielding ones. MFI is one business, and credit cards could be another. Currently, we are building those capabilities, and from next years, we will be handling those kinds of products,” he said.
Yes Bank has been scouting for acquisitions in the MFI space since FY24. “Valuation expectation was very high,” he explained when asked why a deal is taking time. “Whenever we find a right match and mix, we will definitely be there as we are very much interested,” Kumar assured adding that the bank isn’t targeting a particular size of MFI for an acquisition. “The consideration is more in terms of quality of management”.
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