Interview: NPAs to come down and net interest margin to improve this year, says Bank of Baroda managing director

We expect that credit growth would be better this year as compared to last year. Last year we had expected a credit growth of 7-10 percent; this year we believe that should improve to 10-12 percent.

This is after considering the fact that there will be some impact in terms of the rate increases possibly on the retail side but when it comes to corporate loans I think we should see a better year.

Last year the challenge for us as a bank was that there were opportunities in corporate loans, but because of the abundant liquidity the pricing and risk equation were not working out in a manner that was acceptable to us on some occasions. This is why if you see our overall loan growth, the corporate segment was the most muted and organic retail grew fastest at about 17 percent.

This year we expect that corporate loans should do better. They should be able to generate decent growth and margins.

What is the focus on retail business?                                                

For us unsecured personal loans is a business that we are building; it is almost entirely for our existing customers and almost entirely intermediated with digital with BoB World being the prime platform for that business. We doubled our portfolio from about Rs 4,500 crore to nearly Rs 10,000 crore. This year there is an opportunity for us to do much better.

Similarly, car loan is one area where we have had a competitive advantage for many years, growing 20 percent or better than those over the last few years. So we believe we should be able to sustain very good growth there also. Home loans we grew organically by about 11 percent -- I think there is room for us to accelerate that further.

So overall, we believe that despite some impact of increase in rates, which might be there, we should be able to make sure faster growth comes from the retail side and corporates would be a little slower.

I hope it (organic retail loan growth) will be somewhere in the same ballpark (as compared to FY22). If you look at overall credit growth rate target of 10-12 percent (for FY23), then corporate growth should come in at 8-10 percent.

How will the recent RBI rate hike affect your margins and treasury book?

In terms of our loan book, it (repo rate hike) should be positive at least in the short to medium term because of the lag between the repricing of loans and that of deposits. In terms of treasury portfolio, we seem to be reasonably positioned. Our AFS (available for sale) book is about 40 percent, which being a floating bond portfolio gets repriced as rates move up.

I think a large proportion of the challenge came within the year that we have closed (FY22) because even though the Reserve Bank of India (RBI) has raised repo rates now, the markets had anticipated it for some time and therefore the 10 year bonds (government securities) had gone up by 60-70 basis points (bps) last year itself.

We believe that just like we were able to absorb the impact on our treasury portfolio last year and still have decent numbers in terms of overall profits, we believe the same should be possible this year with of course the upside that NIMs (net interest margins) should increase as repricing happens.

Where do you see the net interest margin?

We would want to be disciplined in terms of both loan and deposit growth, the way we were last year. Focus on areas that give us decent margins and therefore we expect a further 10 bp improvement in NIM this fiscal.

What is your guidance on asset quality for FY23?

We have seen sequential improvement in gross and net NPAs (non-performing asset) almost every quarter for last many quarters. That has largely been driven by the fact that corporate credit cycle has been improving.

The crises which were there four to five years back are behind us and fully factored in and this improvement sustained even through COVID-19 which was challenging. Thus, I expect there is still some more room for this corporate credit cycle improvement to get reflected in numbers. I do expect this year also gross and net NPAs, slippages and credit cost will come down further.

So can we expect GNPAs to fall below six percent by FY23-end?

Tough because it is a function of so many components…with a fair degree of confidence we can say that we should see further improvement as we go ahead.

Will you also offload NPAs to National Asset Reconstruction Company Ltd (NARCL)?

It is a figure which is not very large for us (amount of bad loans to be transferred). I think the improvement in gross and net NPAs will happen even otherwise. The NARCL transfer might impact margins but it is going to be more driven by general improvement in asset quality.

Can you share capital-raise plans for FY23?

Our current capital adequacy ratio is about 16 percent so we are in a good place as far as that is concerned. Also, we expect that internal accruals or profits should be enough to fund growth for this year.

The sanction from the board (to raise Rs 2,500 crore) is in respect of AT-I (additional tier-I) bonds or subordinate debt. You have some maturities of AT-I bonds so this will largely again be going towards raising AT-I bonds and subordinate debt.

AT-I bonds are risky debt instruments as seen in YES Bank crisis. Why are public sector banks increasingly choosing this route to raise debt?

I think at the end of the day it is really a function of where the markets are. As of now there is a market for us to access and get these bonds subscribed to at competitive rates. Therefore, it works for us.

From the viewpoint of investor, I think certain protections have been put in place including who can subscribe to the bonds. It has to be somebody who is a qualified investor.

To that extent we feel fairly comfortable both from our viewpoint where we are able to access markets at a reasonable cost, have a diversified investor base and also from the comfort that the investor has. That they get a yield pickup from an instrument which they understand because you are not talking about retail investors subscribing to it (AT-I bonds).

Do you expect an increase in fundraising via AT-I bonds by more private banks?

I do not know. I really wonder, although again it is a fact that as interest rate rises, these may be not as attractive as they were last year but it really depends upon what is the kind of rate you can access.

For us, I think the rates at which we have been able to raise the bonds are just a little above what SBI’s (State Bank of India) rates are so we are very comfortable at the cost at which they come to us.

Can you give a timeline for IndiaFirst Life Insurance IPO?

I think IndiaFirst is currently the fastest growing insurance company in the nation. Last year, they grew nearly 50 percent which is the fastest of all insurance companies.

It is a reasonably mature business now and therefore we believe this is a time to start actively considering listing. In terms of timing, it depends on how markets stand at that point in time.

So while we are looking at the possibility of finding the right opportunity this year but that is something we will see as we go forward.

So can we expect the IPO this fiscal?

I would believe so. It is very good business doing very well so I think it should find good investors.

How many customers will BoB World onboard this fiscal, what are your key digital initiatives for FY23?

It is a fact that digital is really transforming almost every business but the one which was most impacted is retail. We launched BoB World in August last year and in less than a year we have acquired 10 million more customers. As of now BoB World has 20 million customers; we expect that we will take this to 30 million this year.

At that level it would mean that 50 percent of our non-FI customers would be using BoB World…once you have 50 percent penetration it is pretty much on par with private banks in terms of the penetration they have for their mobile application.

As of now we are opening accounts straight through processing and video KYC in BoB World. The personal loan portfolio is largely enabled by digital and Bob World…so a lot of businesses which would have been cumbersome to execute like retail personal loans, they have become much simpler.

Even other products like MSME (micro, small and medium enterprise) --now nearly 30 percent of the MSME renewals are happening through digital…we are moving thousands of people into marketing, BoB World, wealth management, and that is possible because digitisation is freeing up our resources. Currently three times as many people who visit our 8,000 branches visit BoB World every day and that proportion is increasing by the day.