On November 5, state-run Bank of Baroda reported a net profit of Rs 3,313.42 crore for the quarter ended September, an increase of 58.7 percent from a year earlier on the back of improved asset quality and healthy core income growth.
Gross non-performing assets (NPA) were at 5.31 percent of the total loan book, down from 8.11 percent from a year ago. On a net basis, bad loans were 1.16 percent of the loan book, compared with 2.83 percent a year ago. Fresh slippages were Rs 3,479 crore, down from Rs 5,802 crore a year ago.
In an exclusive conversation with Moneycontrol, the bank’s managing director and chief executive officer Sanjiv Chadha spoke on a whole host of issues ranging from the outlook for credit-deposit growth, assessment of asset quality and the impact of rate hikes on loan demand.
Chadha said the bank is currently targeting loan growth at 12-15 percent for FY23, while keeping a “tight discipline” on margins. The bank also aims to recover bad loans worth Rs 12,950 crore in this financial year, he added. Edited excerpts:
What is your assessment of credit growth for this year?
When we look at credit growth, our stance has been that we would want to grow at market (levels) or better while making sure that we keep a very tight discipline on margins. We don’t want to compromise on margins—that’s the stance we would continue to have. Our initial estimate when we began the year was that credit growth for the full year will be somewhere around 10-12 percent. While this quarter’s credit growth may be exceptionally high, we might find systemic growth to be slightly higher than what we had estimated at the beginning of the year. So we see credit growth anywhere between 12 and 15 percent for FY23. That is where we would want to be, maybe better than that.
What gives you confidence to grow at those levels?
We have seen good growth in retail (loans)—which has grown by about 28 percent—and corporate credit growth is still not where it can be. There is still an upside for us when it comes to corporate loan growth. Overall, we are fairly well positioned. My own sense is that we will end up between 12 and 15 percent for the market.
What will your loan book mix be?
Corporate (loans) forms about 47 percent of the book. We have been trying to grow our retail (loan book) faster compared to corporate because we believe that from a risk-management viewpoint, it is better to have a higher proportion of retail than corporate. Therefore, I would expect that our growth in retail would continue to outstrip corporate growth for a few quarters, going ahead.
Do you believe that rate hikes will dampen demand for credit?
I think at the end of the day when the RBI (Reserve Bank of India) is hiking rates, at some point in time the aim of that is to have an impact on demand because the target is to bring down inflation. The impact on demand will be there. At the same time, we have currently seen that the demand for credit has been quite robust. It is currently elevated compared to sustainable levels and, to that extent, it would bring down demand. But if you compare loan growth as compared to previous years, it will be substantially better despite the fact that demand will be impacted because of higher rates. What we are seeing is a normalisation of rates—rates are still not higher than in pre-COVID times. Therefore, the impact on demand might be there, but it should not be very large.
What will be your strategy to mobilise deposits?
Overall, our deposits have grown by 13 percent, with domestic deposits up 11 percent. We have to appreciate that the gap between credit and deposit growth is not very large. At some time when credit growth stabilises, the credit-deposit growth will converge in the next few quarters.
I don’t think this is the time to be very aggressive with deposits. At the end of the day, we need to have an assessment about the rate elasticity of deposits. If there is a constraint in terms of market liquidity, then the increase in rates will not give you commensurate returns after a point in time. I think for banks in general and for us also, it will be a targeted approach while trying to see where the rate increases can impact incremental mobilisation of deposits.
Any guidance on net interest margins (NIMs)?
I think we had guided at the beginning of the year that our margins would move up by 10 basis points. I think the current 3.33 percent may be a bit of an exaggeration. Going ahead, we would stick to the guidance that NIMs for FY23 will be 10 basis points higher compared to last year.
How would you assess your asset quality ratios?
I think it is important to appreciate that in the last few years, even during COVID, our gross and net NPAs (non-performing assets) came down every quarter. That is because there was a broad improvement in the corporate credit cycle. Therefore, even as COVID impacted retail and MSME (micro, small and medium enterprises) loans, the overarching impact of the corporate credit cycle outweighed the impact. In the post-COVID world, while the corporate credit cost continues to be low, there is still scope for credit costs to fall further and sustain at lower levels. Hence, we see scope for gross and net NPAs to fall. Overall, we are quite sanguine about improving our NPA ratios. Net NPA ratio might slip below 1 percent also in the coming quarters. That’s pretty much how well it can get.
Also read: Rate war to mop up deposits may hurt banks’ margins, say experts
Can you throw some light on your restructured book?
Our restructured book is about Rs 17,000 crore and it is behaving reasonably well. There have been some slippages in the MSME sector and retail, which is normal. But the fact that overall slippages have come down indicates that this book is behaving reasonably well.
Do you anticipate any large slippages?
We don’t see any large slippages at all on the horizon. There was one slippage on the international book but that is also an account that it has been previously restructured, defined as ‘stressed’ and adequately provided for. We don’t see any major surprises coming through in terms of slippages.
Provisions have dropped 40 percent year-on-year. How should one read into it?
Ultimately, provisioning is linked to fresh slippages and how much you have provided in terms of our existing NPA book. Including technically written-off accounts, our provisioning is currently at 92 percent, which means that even if there is a 10 percent recovery, we will be writing back. In terms of slippages, too, they have been coming down. So we have guided that our slippages will be between 1.5 and 2 percent this year and in the first half itself we are at 1.53 percent. Here, too, we are at the lower end of the scale. The fact that slippages are coming down and the existing NPA book is very well provided for would mean that the need for extra provisioning may not be there.
What is your bad loan recovery target for FY23?
The total recovery target is Rs 12,950 crore. We may not have significant NARCL (National Asset Reconstruction Company Ltd) recoveries; all the recovery that is happening is through our own books in terms of organic means and that is what we will continue to see. NARCL recoveries could be a one-off, but in our case it is not expected to be very large.
Do you foresee any capital raise in the coming quarters?
If we can produce profits at this rate, that should be adequate to fund our credit growth. So for the moment, we don’t have any plans to raise any capital from the market.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
