The credit crisis plaguing the non-banking financial companies (NBFCs) will lead lenders to focus more on quality of loans rather than growing the size of the books, according to IndusInd Bank chief Romesh Sobti.
“We have reviewed our exposures to the NBFCs and also the asset-liability profiles of the companies and we feel comfortable. As far as we are concerned, there is no moratorium on lending to NBFCs…Most banks would have gone through the books to take stock. The focus is now on the way NBFCs are funding their books – whether they are funding short and lending long, which is the classical mismatch (including in IL&FS),” said Sobti, IndusInd Bank’s Chief Executive Officer and Managing Director.
However, IndusInd has no intention to stop lending to NBFCs.
The mid-sized private bank reported a slower growth in net profit of 4.6 percent at Rs 920.25 crore in its second quarter financial results for FY19 on October 15.
The profit was largely impacted due to a sharp increase of 68.6 percent in provisions at Rs 590 crore including a one-time contingent provision of Rs 275 crore towards the financially troubled IL&FS or Infrastructure Leasing and Financial Services, which has defaulted on multiple debt obligations.
Speaking at the post results press conference, Sobti confirmed the contingent provision was made after assessing the “worst case” scenario that may emerge in the course of resolution of the IL&FS's financial troubles. “We may not even take that much of a hit because our exposure is against very specific cash flows,” he said.
According to him, slowly things would come back to normal but a “new normal”.
There will not be any more reckless lending. One would expect that the pace of lending will be (slow) like someone said the focus will be more on quality lending than growing the book, he said.
Deal with IL&FS subsidiary
In June, IndusInd Bank announced a deal to acquire IL&FS Securities Services Limited, (ISSL) – a 100 percent-owned subsidiary of IL&FS dealing in the capital markets business.
Sobti is confident of closing the deal with all regulatory clearance “sooner rather than later”.
“All due diligence is done and we think we should go ahead with the acquisition. No concern from our end. It is a standalone and specialized subsidiary. It fills the gap in our product suite and we are in constant interaction with the company and the deal should be concluded sooner than later," he said.
Sobti refuted concerns over transparency at IL&FS, saying the bank has done strong due diligence and knows exactly what is in the ISSL books.
Interest rates and outlook
IndusInd Bank’s credit growth stood at 32 percent with corporate advances up at 35 percent over last year and retail loans rising 29 percent. Deposit grew 19 percent year-on-year, with low-cost deposits accounting for 44 percent of total deposits.
“We are happy with our growth of 25-30 percent in our loan book. Credit growth is now expanding on a more secular basis, capex (capital expenditure) is coming into the private sector. Every sector is growing now unlike earlier. Growth will continue for banks, for NBFCs we will have to see,” Sobti said.
On interest rates, he feels lending interest rates are set to increase from here on.
He believes there may be another 25 basis points hike (by the Reserve Bank of India) before the end of the financial year. “Therefore, cost of funds has certainly gone up…Rates are going to rise on the lending side because deposits have already risen and rates on the lending side have to catch up.”
According to Sobti, there was intense competitive pricing coming out and banks suddenly had irrational pricing by lowering interest rates.
“Now I think there will be more realistic pricing. Secondly, this will give an opportunity to grow. It is not that NBFCs will give more space but there will be more rational pricing than just growing the book,” he added.
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