Credit cost expected to be below 60 bps In FY17: IndusInd Bank

He expects bank’s credit costs to stick to be below 60 bps this fiscal year.

He said it was unlikely that SME, MSMEs will see a full impact from the note ban in Q3 and Q4.

Loan books should continue to see growth of over 20 percent, he maintained, adding that money from demonetization is going into MFs and insurance sector.Below is the verbatim transcript of Romesh Sobti’s interview to Anuj Singhal, Latha Venkatesh & Sonia Shenoy.

Latha: One of the analysts we spoke to called it a miracle set of numbers. I mean there is no impact of demonetisation on your numbers?

A: No, it is not that all businesses were unaffected and also not that we are teflon coated. We did see, initially, in our businesses, one of our major businesses of vehicle finance where we saw a certain drop in enquiries especially on commercial vehicles (CV). However, I think the pickup happened pretty swiftly. After the first 10 or 14-15 days we saw a very swift pick-up because there were inherent demand, for instance in commercial vehicles.

November was not as bad as we expected and December also has not been as bad as we forecast actually. We had forecasted lower numbers; similarly microfinance, for instance was affected, initially collections were affected but there also the pickup was very swift. So, collection was not affected but disbursements have been affected. So, some areas have been affected, so it is not that everything is hunky-dory.

Latha: When we look at the two-wheeler numbers, what we got for December was fairly drastic. I mean falls of 30-25 percent in some cases. Likewise for commercial vehicles, in Ashok Leyland’s case the stock went up on the announcement of the numbers because it was not as bad as the market thought. The market was expecting probably a 12-15 percent fall and it came in at a 9 percent fall or their about, but it was a fall nevertheless. How is it that your CV portfolio has not been impacted?

A: During this period, we gained market share and that is one of the long-term trends that you will see that banks never operated in certain areas which were cash dominated and that is why the banks' share in total financing was less, for instance two-wheelers, only 20 percent of two-wheelers sold were financed and the rest was done in cash. Now a larger part of that will come in. So there will be some shift in market share from NBFCs to banks especially in the area of vehicles. So, in a dropping market, we increase market share that is the only rational explanation of the fact that our disbursements went up quarter-on-quarter.

Anuj: The other interesting bit of your numbers was your margin performance -that has been the best in class, at 4 percent. Now we have the low cost deposits because of demonetisation but we have seen lending rate cuts as well. What is the outlook on net interest margins (NIM) from here on?

A: Our NIM had touched 4 percent even last quarter and given the down trending in cost of deposits we thought that there would be a slight expansion. However, what happened is that while cost of funds actually went down by 24 basis points, which is pretty dramatic in a quarter, but the yield on assets also fell by 24 basis points, so we passed on the drop in cost of deposits to customers especially on the corporate side of the business and that is why we were able to sustain our NIMs. Otherwise the trending was that we should have seen a slight expansion.

Latha: Money came back cash in terms of payment of loans. For many banks the expectation is that loan between September 30th and December 31st will be flat because loans have been returned. Did you see any return?

A: We saw the usual repayments because many of our businesses are EMI based, so we have larger payments. However, in terms of how specified bank notes (SBNs) how much SBNs went into repayments that figure was not very large about Rs 700 or 800 crore. So we did see some repayments but they were not unusual in their character.Sonia: You did mentioned that most of your retail products, commercial vehicles, two-wheelers, utility vehicles as well have been growing at a steady pace and given that you are gaining market share from NBFCs, should we expect to see your asset quality remain under this 1 percent mark something that you have been painstakingly maintaining for very long time?

A: Apart from gross non-performing assets (NPAs) we focus a lot on the total credit cost because credit cost goes beyond is provisioning, write offs and the loss on sale of repossessed vehicles. Credit cost, we had forecast for the full year at 60 basis points. Last three quarter we are stabilised at about 50 basis points so we are 44 in nine months. We should be well within 60 basis points. So, I would say that this year and next year we would still stick to that sub-60 basis point credit cost.

Anuj: This is maybe not as relevant for IndusInd Bank but as banker your thoughts on whether we could see the NPA problem coming back especially in the small and medium-sized enterprises (SME) and micro, small and medium enterprises (MSME) space as we move forward because of demonetisation and the lagged impact?

A: I think in this quarter it is not going to reflect anything. It is too early for an impact to be seen but quarter four and quarter one; we got to see how it pans out so some businesses have been impacted. You got to recognise one part that typical SME especially at the lower end of the spectrum would not disclose the full value of his business on his balance sheet, right, and a lot of it was cash, so that part is going to be affected. So, there will be some impact on the SME sector, but it is too early to say it has already happened. It might impact we haven’t seen anything yet.

Latha: Two questions from that - do you expect impact even on your bank from the SME space next quarter that is current quarter and next as well why did it not show an impact already, after all that forbearance for recognising and classifying as NPA was only for loans under Rs 1 crore. There will be a bunch of SMEs and MSMEs above Rs 1 crore why wasn’t the pain showing in December itself?

A: There is a spill over effect, October was a good month overall and this happened on November 8th, so November also it spilled over. December might have shown, not in our books but might have shown in the books of many banks. So, Q4 will be more validation of the fact whether they are affected or not.

Sonia: Just talking a little about the breakup of the loan growth – 25 percent - if you break that up the non vehicle book was very strong but within commercial vehicles as you yourself pointed out there was a slowdown so the growth was just 10 percent. What kind of average loan growth can we expect over the next 6 to 12 months from the bank especially in some of these slightly more vulnerable pockets like commercial vehicles?

A: You spilt the growth of 25 percent into -first corporate; corporate also grew by 25 percent and then on the retail side you spilt it into vehicle and non-vehicle; the vehicle grew at 21 percent and the non-vehicle part, which is much smaller, grew at about 42 percent. I think the spread of our retail lending is so sort of wide that we would still be able to sustain this growth in the region of 20 percent odd on vehicles because we are seeing good January and the pickup has been there, so December usually is a slow month but January has been a good pickup. Apart from two-wheelers we are seen a good shift in market share, so that part is going to be sustained.

The non-vehicle retail is small, so 35-40 percent growth rate in absolute terms are not very meaningful, the real test of growth is on the corporate side and there the fact that we have become more competitive in terms of pricing because of the drop in the cost of deposit - one and our ability to be more flexible on the marginal cost of lending rate (MCLR) then I think we are able to sort of get better utilisation of limits which we didn’t have in the past.

So that gives us slightly longer runway even on the sort of corporate side. So, overall to answer your question, I think mid 20’s is what we are aiming for.

Latha: Final question on the industry itself, a couple of things are going well. What are the kinds of lending rates for homes that we are seeing – 8.35 from Bank of Baroda, 8.50 from Punjab National Bank (PNB), 8.6 from the biggies State Bank of India (SBI), ICICI Bank? How much more does money get cheaper and how does that impact banks. Are you going to see a whole bunch of teetering corporate now being able to pay because of a seminal fall in leverage?

A: Apart from the short-term aberrations there are some longer term themes which are emerging and one of the themes you talked about which is the liquidity in banking system but the beneficial impact goes beyond that. I talked about one which is the fact that we can now go into those areas which used to be cash dominated and therefore dominated by NBFCs. The second one is the infusion of deposits and therefore reduction in MCLR and that. I would imagine that refinancing would happen for certain bonds because MCLR gives you certain flexibility now. So, that's a secular trend that we are seeing.

The third one which is emerging and you will see it playing out; we saw it already in December, is that part of this demonetised money actually is going in to mutual funds and insurance. Therefore, the distribution part of the businesses for banks also should be an attractive area to watch for.

As far as the cost of funds is going I think the transformation is happening very rapidly. The upper end of corporate, of course, it is instant. The demand for credit is not so high therefore pricing pressures are there, so I think we would see a more secular downtrend in rates and you are going to also see a revision of rates on savings banks accounts for all those people who are giving 6 and 7 percent.