RBI's move to absorb excess liquidity by ordering the banks to temporarily place their cash deposits in the CRR window has led to a dip for Indian bonds and banking stocks on Monday.
Going forward there will be good availability of liquidity and digitisation of the banking sector will lead to behavioral and client changes, says Shyam Srinivasan, MD and CEO of Federal Bank.
He said that in the long-term small-medium enterprises (SMEs) will benefit as most transactions will be formally captured.
The bank has calibrated all ATMs to incorporate Rs 2,000 notes and more than 50 percent ATMs are calibrated for the new Rs 500 notes, he said.Below is the verbatim transcript of Shyam Srinivasan’s interview to Latha Venkatesh & Anuj Singhal. Latha: Aside from the immediate mark to market gains and the losses due to cash reserve ratio (CRR), give us the wider picture. Are you a little worried that asset quality is going to take a beating for not just one but maybe a couple of quarters?
A: I would first begin by extending big thanks to our employees and generally bankers. However, what has happened over the last three weeks and I saw a tweet from you also is quite profound. The level of readjustment in the service that is going on is quite sort of unimaginable.
In that context my beginning belief is that a lot has changed and probably this is only the beginning. We have to readjust to a very different new reality. So, if any predications of how it will be one quarter down or two quarters down are very difficult. So, we are actually dealing with a lot of dynamic moving parts every day. But two realities are coming up, one is the fact that the digital movement is now real and which is something we were quite excited by trying to spearhead is now going to get real big fillip.
Second is availability of liquidity will be quite material. So, consequent to this a lot of behavioural changes, client changes how small and medium-sized enterprises (SMEs) readjust, how large retail borrowers behave is going to change. So, credit quality per se near term there may be some blips in the SME sector but I generally believe in the longer term even SMEs will benefit because a lot more of the transactions will be formally captured. One of the problems banks had to lend to SMEs was never visible transaction flows. So, it may be very material in quarters ahead. We have seen improvement in our SME level at this point in time. Now I don't know if it is momentary or it is going to be sort of longstanding but short point, lot of changes, a lot of long-term good near term pain but we have probably crossed half a bit.
Anuj: The big question is what is on ground situation because we are still seeing a lot of queues outside ATMs, there is still cash running out of ATMs and that is the big problem.
A: There are two parts. The availability of currency is something that, as all of us are aware, is work in progress. So everyday there is more cash. But by the time we load, by half day the cash is out. Almost all our ATMs have been recalibrated for Rs 2,000. More than 50 percent have been recalibrated for Rs 500 notes. So, by end of this week, latest by early December ATMs will be ready to accept or dispense all the currency denominations, but every day we are seeing incremental flaws. The new Rs 500 is what needs to take larger number; it should happen over the next two-three weeks.
However, your first point about gradual migration to digital. This is a step jump that has happened. I will give you an example. In our case two learning I have had. One is we were seeing almost every quarter mobile based banking transaction were doubling albeit a small base. This quarter in the period say November 8 or November 10 really when really the thing hit everybody November 10 to weekend of November 26 we saw that improve quite substantially but interestingly it was low ticket. So, the volumes didn't go up as in quantum didn't go up but the average ticket size dramatically improved whether it is mobile; point of sale (POS) or even unified payments interface (UPI).
So, the catch up was happening and 70 percent of my footprint is rural, semi urban. It is not like high street Mumbai. We are seeing movement there also compounded by the fact that the banks are growing really help for other, trying to give the point of sale in place, promote UPI and promote our Lotza, which is our UPI app or whether it is mobile banking. So, yes, it is going to take time but I see that this is a big fillip that has come but maybe a much needed one.
Latha: How much do you think your margins or your profit will be crunched in this quarter and specifically on the other income front, now that you have to pay a CRR, for the moment at least is your other income also a hit?
A: On CRR I am quite convinced the regulators will step in with some kind of meaningful compensation. I don't believe it will be the banks bearing all of it, but that said it has to be sort of watched for.
In terms of overall fee income coming down, thankfully in a very cruel way the percent of fee income for us not a material part of our incremental revenue growth. So, to that extent I am not too alarmed. Yes, there will be some dent but there are other opportunities from the treasury side which may square off some of these impacts.
On the margin side I would say it is early to call because the big credit disbursements, if it were to happen between now and December end, some of the portfolios that we are looking to acquire and there are some few opportunities which we have lined up which the transaction may go through, the impact may not be very significant. Yes, there will be because we are carrying deposits which have not been - our certificate of deposits (CDs) ratios has dropped. So, there will be some impact but that is pan-industry, so the differentiation will come who does it betters.
So, yes, there will be some impact in the order of may be 5-8 bps but that is something that we are trying to find other avenues because if the credit slippages are lower then the interest reversal on account of slippages is something that we can help to offset the lower margin. So, it is many dynamic moving parts. Yes, jury is out but the effort is to try to make sure that we come out quite ahead.
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