Exclusive | Federal Bank looks to grow unsecured loan book ‘quite well’, says MD Shyam Srinivasan

Kerala-based private sector lender Federal Bank has attempted to transform into a pan-India entity by betting on technology under managing director Shyam Srinivasan who has been at the helm for over a decade.  Even when the going got tough during pandemic, the bank managed to outperform rivals and maintain asset quality.   

Federal Bank reported 13 percent net profit growth in the quarter ended March 31 because of a sharp drop in provisions.

Net profit increased to Rs 541 crore from Rs 477.81 crore in the same quarter previous financial year. Provisions and contingencies dropped 70.4 percent to 75.24 crore.

Gross non-performing asset ratio dropped to 2.80 percent at March-end from 3.41 percent a year ago and 3.06 percent as of December-end.

In a conversation with Moneycontrol, Srinivasan speaks about his vision for the bank. 

Edited excerpts: 

What have been your key lessons from COVID-19? 

COVID taught us all that you can never be prepared. We have discovered that we are never prepared enough even though we think that we are prepared for any situation. COVID was like a curve ball and none of us were prepared for it. 

Interestingly, for Federal Bank, the last eight quarters of the COVID period, sequentially all quarters have been better. I think the message for us in the bank is that, COVID or otherwise, you have to play with a straight bat and your head down. You have to be consistent; that’s how your results come. 

How was Federal Bank able to withstand the COVID shock and deal with the competition? 

We all have our own strategies. For many years, our liability franchise has been strong and very granular; that has helped. Because for many years, not just during COVID, we have been very conservative with our credit underwriting practices. So, during COVID, the book did not see excessive stress. We did not have many high-risk profile clients. To that extent, the book quality did not see much stress and our credit standards have held well. In fact, our credit costs are among the lowest in the market. I think credit standards and the liability franchise have held up quite well for us. 

The bank’s asset quality has held up well. What gives you the confidence to sustain this trend going forward? 

The business mix that we have built and the credit standing that we have built is pretty good and that bodes well for our asset quality. Second is that our current SMA (Special Mention Account) book or the slippages from the restructured portfolio are behaving significantly better than what we had feared it would be. We had made certain provisions for that beforehand. In all, the collection efficiency, the business mix, the rating quality and the performance of the restructured book gives us the confidence that FY23 non-performing asset ratios will be maintained or will be slightly better. 

Any guidance on slippages for FY23? 

Our slippages are at 1 to 1.5 percent of our portfolio. We should be able to contain them in this range. 

In a rising interest rate scenario, where do you see your net interest margins (NIMs) headed? 

Our average NIM has been around 3.20 percent and I think with the business mix changing and the rising interest rate environment, our focus is to take that up by 5 to 10 basis points on a full-year blended basis. We do see that happening in FY23 – partly because of the rate increase, partly because of the changing business mix and partly because the reversal of interest income is coming down as credit quality is improving.   

So, will you be transmitting the rate hike to borrowers entirely? 

Forty to 45 percent of the bank’s book is repo-linked. So, as the repo changes, automatically the rate transmission will be there. 

Do you see rising interest rates as a dampener to loan growth? 

My view is that in a rising interest rate environment as people expect interest rates to go higher gradually, in the early phase, there will be faster growth. Everybody will play catchup before rates are hiked further. I think full-year credit growth for the industry will be somewhere around 10-12 percent as things improve. 

And where will Federal Bank stand in the industry, if this were to happen? 

We, at Federal Bank, should see higher credit growth. We expect the number to be around 15 percent for FY23. 

Can you elaborate on the loan book mix? Where do you see this in FY23? 

Our mix between retail and wholesale is 45 and 55 percent respectively. The mix will more or less remain the same. However, within that mix, we expect to see some pickup in unsecured credit retail — credit cards and personal loans — which today is a very small number. We expect commercial banking to grow faster than corporate. There is a large opportunity in the middle market. So, the mix between retail and wholesale will be 55-45 (percent) but within that, retail will have a slightly higher share. 

Coming to the credit card business, what is the current outstanding? Do you see potential for it to grow?   

Right now, our credit card outstanding is Rs 250-300 crore. We expect that to be well in the Rs 1,000 crore plus mark going forward and it will reflect fourfold growth, but it will still be less than 1 percent of our total outstanding. We think we have the potential to grow that quite well. 

Will Federal Bank step on the accelerator to boost credit growth? 

Our general philosophy is not to be gung-ho about credit growth because if it looks good at this point in time, it doesn’t look good two years later. We are a little more cautious. Overall, credit growth in unsecured products will pick up quite well. 

What is the plan on branch expansion? 

We do have an active plan. For about five to six years, we were reasonably stingy on new branch openings; we wanted to make sure that our current branches were profitable and growing. I am happy that in FY22, there was only one branch that has been in loss, that too because it was a new branch. So otherwise, branches have turned positive. On the strength of that, we have turned a little more confident that we will keep stepping up on branch expansion. We see that roughly 5 percent of our current branch network gets added each year. So, in FY23 we will add 60 to 65 branches. 

Do you see scope for the cost-to-income ratio to improve? 

In FY22, our cost-to-income ratio had increased because in the last quarter we saw a one-time cost impact. This was because family pension which could be amortised in five years, we took it in just one quarter. To that extent, our cost-to-income jumped. On a full-year blended basis, it is around 52-to-53 percent. We see that coming down to 49 to 50 percent in FY24.   

How will the HDFC-HDFC Bank merger impact players like you? 

The merger will take some time to complete. Therefore, for players like us, we are quite agnostic towards it. They were big; they are becoming bigger. For banks like us, we have to keep growing. My view is that it may not impact us on a day-to-day basis. Strategically for the industry, it may mean more mergers and acquisitions, but those were going to happen anyway.  

Is Federal Bank looking to acquire any businesses currently? 

There is nothing on the cards at this point. 

There were talks about Federal Bank interested in acquiring a microfinance business. Any update on that? 

Microfinance remains an area of interest for us. We haven’t found anything attractive to buy. So now we have our own capability of building our own MFI (microfinance institution) business. The team has built good products and made technology-driven innovations. Our MFI portfolio, which is about Rs 300 crore, can get close to Rs 1,000 crore on our own. If we buy something with a Rs 5,000 crore book, we are happy to look at it but at this point, nothing that interests us is available. Or anything that is available is not interesting us. 

 The Bad Bank is yet to become operationalised. Your thoughts? 

Since our loan book quality is reasonably good and we don’t see any significant portfolio for sale, I am not giving it much attention. Generally, sale to an asset reconstruction company makes sense only when you have a big credit problem. Mercifully, we don’t have that. 

When do you expect the National Asset Reconstruction Company Ltd (NARCL) to begin operations? 

There are issues around NARCL to get going. I expect that by July-September this year, some action around it will take place. But, in itself, we may not be a very active player in it. 

Any fundraising plans for FY23? 

We are not looking at any fundraise right now. Our CRAR (capital-to-risk weighted assets ratio) has gone up to 15.77 percent. With that kind of CRAR, CET (Common Equity Tier) 1 ratio of almost 15 percent, we don’t see the need for incremental capital right now. Our focus is not to go into any fundraise at this point in time.