Microfinance, non-vehicle loan book to drive growth: IndusInd

He is confident of the net interest margin crossing 4 percent in the coming quarters from 3.97 percent posted in the first quarter and 3.94 percent in the same quarter last year.Below is the transcript of Romesh Sobti’s interview to Anuj Singhal and Sonia Shenoy on CNBC-TV18.Anuj: The first things that I want to know is how did you maintain 30 percent credit growth in this environment and that too with increase in net interest margins (NIM)?A: The credit growth, to use a word often used in politics, is a secular growth. So, we have seen a growth of almost 30 percent corporate and an almost similar growth on the retail side. So, both sort client segments are pumping nicely. The retail of course is more universal. You are seeing good retail growth all around and in our book of course, since 70 percent of our retail book is vehicle financing, that part which had languished for two years now is showing very robust growth quarter-on-quarter (Q-o-Q) as well as year-on-year (Y-o-Y). So, that has grown almost 23 percent in which commercial vehicles (CV) have grown 26 percent. And then of course, there is the non-vehicle retail which is growing in the mid-40s because it is coming off a very small base. The corporate side, perhaps there are more questions on the corporate side and the corporate side, we cannot really pick on a sector where we are growing, because we are seeing some pull on the working capital side, which is pretty well spread out across various industries. A little bit of pull on the renewable side, so solar and wind power, etc. Otherwise, it is mostly working capital. We are beginning to see a little bit of the brownfield stuff also happening on capacity expansions of existing companies, but no greenfields yet. So, pretty well spread out growth.Sonia: I just wanted the prognosis here on. You spoke about how commercial vehicles have grown at a very steady pace of 26 percent. Do you think such a rate is sustainable because now, we are seeing some signs of a slowdown in the CV industry, especially with some of the bigger names like Ashok Leyland, etc. and even the two-wheeler space is not growing as well as was anticipated. What is the expectation here on?A: June, I would not say this was a whole quarter phenomena, the one you mentioned. Only June saw a little bit of a slowdown which is a very annual, seasonal sort of a situation. Also, then the monsoons show a lower growth traditionally every year. But we expect that the second half is going to be very strong on CVs. We are also now seeing that the part which was lagging, which is the light commercial vehicles (LCV), they are also now growing in strong double digits. So, we are pretty optimistic that this growth will continue and June is just a little bit of a dip. Two-wheelers yes, little bit of a slowdown we have seen. Again, I think it is more of a June phenomena, but Y-o-Y, two-wheelers have been almost flat. But in our books we have seen last two quarters, two wheelers starting to move up in disbursementsAnuj: Of course, the profit growth was 26 percent for first quarter, I am reading a Credit Lyonnais Securities Asia (CLSA) report which believes that over the next four years, the compounded annual growth rate (CAGR) could be 27 percent. If that happens, that would be best class; something which we have seen from HDFC Bank. Do you think those numbers are doable?A: There are a few things happening in terms of revenue boosters and the other side is that productivity gains should improve our cost-income ratio. On the revenue side, we have a growing book on microfinance and we have got a solidly growing book on non-vehicle retail. So, these two are new revenue drivers, microfinance will certainly move the needle for us, our book is relatively small today – Rs 3,000 crore, but we do expect this book to grow to three times this size in the next three years. And if you put all this together, it would not be too ambitious to aim that sort of a number.Sonia: So, Microfinance would grow three times in the next three years and that looks achievable because of the way some of the other peers are also growing in this space. What about the non-vehicle retail book? How much do you think that could grow over the next three years?A: The non-vehicle retail book is about 30 percent of our total retail book and it is coming off a small base of even this year, this quarter it grew by almost 44 percent. I would say that 35-40 percent growth rates off the small book is realistic and we have to move towards a balancing of the book between vehicle and non-vehicle because every time there is a cyclical move downwards on vehicle, then you scramble. So, that is why we have built this non-vehicle book and there are eight products which have now been launched. So, almost anything that you want to do barring mortgages that you want to do on the retail side is now kicking. So, it is credit cards, it is loan against properties, gold loans, personal loans, commercial cards, the whole works is happening. So, I would imagine that this would continue at a CAGR of between 35 and 40 percent over the next couple of years.Anuj: What is the outlook for margins? 3.94 itself was good, but it is now expanded to 3.97 percent. If you could give us a ballpark range in terms of your margin outlook?A: There are three drivers for the margins in our book. One of course, is the cost of margins falling which is true for all banks. In our book, we have a large component of fixed rate book. So, as rates fall, the fixed rate holds up for a longer period, therefore there is little bit of margin expansion. And the third element is that the rebalancing that we are doing between our corporate book and the retail book. There is a yield differential of almost 4.5 percent between the corporate and the retail book and that book had gone in favour of corporate over the last two years, because vehicle finance slowed down and now, that book is balancing and each percentage point makes a difference. So, I would say that NIM would remain steady or move upwards. We have always had an ambition of crossing 4 percent and this is the nearest we have got to it and we hope to achieve that as well.Sonia: You are close to not just that 4 percent landmark on NIMs, but also very close to that 2 percent landmark on the return on assets (ROA) as well. Can you give us what the journey of IndusInd Bank could be over the next two years or so in terms of these two parameters? How much more could you scale it up to?A: There is the toss up, sometimes you have to take that call on the toss up. So, 4 percent NIM and ROA of 2 percent, they seem within reach. Question is how much more do you want and is there a balancing that you would need to do between of course, remaining competitive because margins means that you are at the higher end of the price range. If you want to do good quality credit, then you want to remain competitive, therefore you will have to pass on the margins to the corporate. So a little bit of a toss up will happen and stability will come around those levels. So, four and two are a very sustainable level for a bank to achieve and that is what we will aim for as well.Anuj: The minor chink in armour was the gross non-performing assets (NPA) moving up. Of course, not alarming, still manageable, but for someone where we have seen asset quality really strong over the last few quarters now, your comment on the fact that the gross NPA went up a bit Q-o-Q?A: The gross NPA is a small tick which is four basis points which is neither here nor there, because if you look at the slippages, that came down pretty strongly from 133 basis points to 114 basis points. That is a very strong movement downward, so slippages have reduced. Credit cost has also reduced from 17 basis points to 15 basis points. There were two accounts as we mentioned in our press release as well. There were two accounts that slipped from restructured to NPA and that is why this little blip has happened. But the needles to be watched are slippages which have improved and credit cost, both of which have improved.Sonia: Since we have discussed at length about your company, it gives us a little bit of time to also discuss the economy because I know you are a keen watcher of that. The latest we hear is that Arvind Panagariya could be made the next RBI governor. As an industry watcher, what would your response be?A: I have been in this sort of a position as CEO for the last almost 20 years and I have seen at least six or seven governors come and find that most governors have the same stance which is anti inflation. So, I would not expect the new governor to take any other stance. So, managing monetary policy and managing inflation remains the major task of governors and I would imagine that the new governor, whoever he is, would also follow the same sort of a path. So, I do not think there is need to be any speculation on what he will do and what he will not do.