Aim at net NPA under 1%; margins between 300-325 bps: DCB

In an interview to CNBC-TV18, Murali M Natrajan, managing director and chief executive officer, DCB gives his expectations for the bank's performance.

 

Also read: DCB Q3 net profit jumps 72.44% YoY to Rs 26.9 cr

Natrajan says most of the bank's slippages were seen in the secured lending department. "Most of the slippages are in the secured kind of lending which is in the Micro, Small and Medium Enterprises (MSME), Small and Medium Enterprise (SME) category. We are pretty confident that while there is a slippage, overtime we will be able to recover," he says.
Natrajan says he is aiming for the gross non-performing asset (NPA) under 2% and the net NPA under 1%. "I have a strong coverage ratio of above 80 percent so, that is the aim of management. We are pretty careful about what kind of loans we are originating. At the same time, when customer’s loan gets into come kind of a challenge, we try and work out with the customer to make sure that they are able to service the loan," he adds.

Below is the edited transcript of Natrajan's interview to CNBC-TV18.

Q: You have posted very good numbers. Nomura’s report said that this is the tenth consecutive quarter of 50 plus year on year (YOY) earnings growth. What seems to have helped definitely is the reduction in provisioning. Can you take us through the asset quality first before we come to the growth parameters?

A: When one talks about asset quality, we have gross non performing assets (NPA) of about 3.8 percent and net NPA at about 0.73 percent. Even in a difficult market we have been controlling the NPAs. The fresh slippages which would be defined as slippages from the opening book of this year are at about 1 percent. Most of the slippages are in the secured kind of lending which is in the Micro, Small and Medium Enterprises (MSME), Small and Medium Enterprise (SME) category. We are pretty confident that while there is a slippage, overtime we will be able to recover. While there is pressure from environmental reasons on specially SME, MSME, I am quite confident that our NPAs will continue to be in control.

 

Q: How is the restructured book looking? How come the provisioning fell because the Reserve Bank rules are actually requiring more money to be set aside for restructured book.

A: The total restructured book for us is less than Rs 10 crore and it is just four accounts. We are not part of corporate debt restructuring (CDR), we left CDR about one and half years ago, so our restructured book is very-very minimal. Our provision coverage at this stage is 88 percent and on an average we have kept it at about 90 to 88 percent. We have very strongly provided for our gross NPA and our restructured book is not much to worry about at this stage.

Q: What were your fresh slippages at this point in time? What would the pipeline for restructuring look like?

A: Looking at this quarter and the next two quarters, I am not seeing too many loans likely to come up for restructuring but we will have to wait and see that. As I said, we are growing our advances book. We have already grown it by 39 percent if you compare it with the previous year same time. We have kept our NPAs in check. The mortgages which contributes about 36 percent is a very good book. There is some pressure on SME, MSME but that is purely because of the environmental reasons. The fresh slippages are less than or just about one percent of the opening book of this year. Since they are all secured books on hard collateral, we are quite confident that we will be able to recover most of those NPAs.

Q: Your consistent improvement in asset quality is quite evident because you have gross non-performing loans (NPL) at around 5.5 percent-5.9 percent at one point in time. What is the guidance by the management in terms of what exactly your sustainable gross NPLs and net NPLs would look like going forward?

A: I can only see what is likely to be NPAs in the next year, year and a half. Our aim is to bring it below 2 percent and our aim is to keep our net NPA below one percent. I have a strong coverage ratio of above 80 percent so, that is the aim of management. We are pretty careful about what kind of loans we are originating. At the same time, when customer’s loan gets into come kind of a challenge, we try and work out with the customer to make sure that they are able to service the loan. We are very careful in terms of choosing which account we want to restructure and that is the reason our restructured loans are very low. They are just four accounts at less than Rs 10 crore.

_PAGEBREAK_

Q: How could you manage an improvement in net interest margins. It is not a small number, but a fairly decent improvement in net interest margins-15-16 basis points. But you also have a high credit deposit (CD) ratio. Will it be possible for you to improve on margins in the last quarter and thereafter?

A: Last quarter margins are always tough because the liquidity is tight in the market and lot of loans that get originated in the priority sector lending, do not necessarily give the kind of yield that other advances give. We will be able to sustain this margin. We have always maintained that we will be able to keep margins between 300 to 325 basis points. If you see the last many quarters, we have consistently maintained that type of margin. Our aim is to sustain margins in 300 to 325 bps corridor. That is how we are trying to grow this book.

Q:  What exactly does your lending profile look like? Can you give us a sense in terms of any sort of exposure or what would your maximum exposure be towards in terms of a sector? Which one do you see most stress from in terms of any sort of specific accounts etc which are in the news recently?

A: We do not have much exposure to infrastructure and power. Our break-up of advances would approximately be 36 percent odd in mortgages and entire retail would be about 42 percent. About 23-24 percent in SME, Micro SME and about 23-24 percent in corporate and about 10 percent in agriculture and inclusive banking. Since we don’t have any skew towards any particular sector, I don’t see any stress in our book at this stage.

 

Q: The new bank licenses are around the corner. Do you think that there is a very good chance that small banks are going to get very lucrative offers from the new licensees? A readymade branch network of 400-500 branches would be extremely mouth-watering if one of the big corporate houses got licenses. Do you see that as a scenario playing out? Have you already been approached?

A: Not at all. We have always maintained that DCB would remain independent. Even during very stressful days I said that DCB is not for sale and still maintain the same. The kind of pressure that I expect because of any new bank license coming would be clearly there, because usually the new banks would like to take some readymade talent from the existing banks, whether it is small or large banks. If Non-Banking Financial Companies (NBFCs) get bank licenses, then on the advances side, they are already competing with banks irrespective of whichever NBFC we speak about.

More so, I would say that the customer is definitely going be a winner, because some if new banks come in and they give any innovative products, the existing banks will have to respond to that. So, I think it is going to be good fun for the customers.

 

Q: Do you think the Mergers and Acquisitions (M&A) scene will hot up?

 

A: It will be a little bit before the M&A scene may hot up. In the last several years, the number of banks that have merged are more than the number of licenses that have been issued. I cannot say whether it is going to happen in one year or two years, but if you look at a three to five year situation, then there maybe some M&A, but that is not to be seen as a comment from me on anything to do with DCB.