Don't see margin impact post base rate cut: Federal Bank

A: The impact on margins, we will have to see. The entire benefit of the cost or rather repo cut has not translated into cost of funds as yet. However, if you take a longer period through the year I am sure between improved credit volumes, better growth in our lower cost deposit products, I am confident that our margins will be on or around the same as it was last financial year which is around 3.2 to 3.25.

So, on a full-year basis I am not very alarmed that the margins will get impacted as long as the cost of funds keep going down. In terms of incremental rate cuts we will have to see how things play out and whether there are forthcoming rate cuts on the repo side and how overall business environment and credit growth is. We have encouraged with good growth in our low-cost deposits for last two months that helped us give the confidence that the underlying input cost can improve in the course of the year.

Reema: The RBI has cut the rates so far by 75 bps. How much has Federal Bank cut its rates so far in 2015?

A: In 2015 this is our first cut at 25bps. Last year ahead of many banks we had cut 35 bps. So we had come down to 10.20 now to 9.95. So, effectively our rate cut for the calendar year 2015 is 25 bps, this is our first cut for the year.

Sumaira: Let us talk about now the RBI news where the now allow lenders to restructure loans by converting debt into equity if borrowers fail to meet the kind of requirements that have been set out in the talks earlier. Do you see banks increasingly now taking advantage of this new empowerment by the RBI or do you still think banks are likely to be more conservative and reserve this only for the worst of the worst cases?

A: Very situation specific but it is a very good enabler that has come and will certainly be a potent weapon in the hands of the banks to work with clients who mean well but have run into a problem. So, this is a good enabler and it is use will definitely be situation specific and client specific. I can visualise banks like us looking at 3-4 clients who have had challenges for the last year or so being sort of this is a good discussion route with them but you must remember that it is a continuum. The JLF was formed, the sharing and information came through, now there is one more sort of armoury in the toolkit to go and negotiate and find a better solution to what looks like a stress situation but at the heart of it it has to be a well designed and wanting to make an improvement kind of situation. If it is wrong intent this won’t work.

Sumaira: But why do you say this will be a good discussion point, wont this now become mandatory?

A: Mandatory is on many counts. The shareholders of the borrower need to come to the party. If the reason, rational is good and it is fairly diversified they will certainly want to because the enterprise value will go up if indeed all the banks come together and make an impact and get a good promoter in, certainly the benefit will be for everybody but if the core design and the intent is not good then this is as good as it is on papers. So, the intent that it is a good enabler is there. Mandatory is the function of how everybody agrees to make it happen. Banks cannot singly force their way through if the shareholders on the other side don’t necessarily agree.

Reema: You said perhaps you will consider this route where three to four clients in your earlier answer. Can you elaborate and give some more details on that and secondly any challenges that you foresee in execution of this?

A: Execution is like I mentioned a while back certainly around the ability of the company to attract the right kind of promoter. The banks may be keen to get in a promoter but at valuation will they come and what will they get out of it. Therefore the execution is in really the operationality of making a business case attractive and of course the shareholders of the company borrower agreeing to participate in this. In terms of names I can’t get specific with name but there have been accounts that have had challenges, who worked out many routes but here comes an opportunity of all the banks coming together, taking equity ownership and then trying to get a promoter in. I can’t cut names specific but yes, there are names that can be certainly looked at and we are not the sole banks. So, we will have to work with other lenders to see how this appeals to all of them but it is literally less than 24 hours. So, we will commence our discussions with the parties both the borrower and other lenders.

Sumaira: My next question is based on the assumption that this move is not handled very arbitrarily by the banks and it is on a case to case basis. What then might be the pipeline of asset sales for the industry that you see going forward and might we see one or two as early as FY16 or FY17 itself?

A: The instances could be more than one or two within the next 12 months. The quantum frankly I have no way to hazard a guess on how big it is because there could be one or two large banks who may want to explore one big asset through this route. SO, that can swing the factor but the examples of it can happen in this financial year. how successful may mean in the years ahead that it can take some growth but I had the view for long that in some cases this is more sensible from the point of view, debt was actually getting equity like pricing in the past. Here is an opportunity to convert your debt into equity and start commanding those kind of outcomes. So the pricing arbitrage that was there is now getting normalised for clients who have not had either good business models or good business intentions. So, this is going to sort of sort that out in perspective.