It took longer for South Indian Bank than anticipated to plug the compliance gaps in its credit card business that the Reserve Bank had pointed out. The bank had since March 13 stopped issuing co-branded credit cards. "Our internal teams are making sure that we remain fully compliant with the norms specified by the RBI," PR Seshadri, managing director and chief executive officer, said in an exclusive interview with Moneycontrol.
Seshadri added that the bank does not have material stress on its gold loan portfolio. On September 30, the central bank in a circular said that it had observed irregular practices in granting of loans against a pledge of gold ornaments and jewellery in select supervised entities (SEs).
The major deficiencies include shortcomings in the use of third parties for sourcing and appraisal of loans, valuation of gold without the presence of the customer, and inadequate due diligence and lack of end use monitoring of gold loans, the RBI said.
Here's an excerpt of the interaction:
Your co-branded credit cards are under the lens since March. What's the update on the matter?
We are having an internal audit done to ensure that we have completed the work required to make us fully compliant with all of RBI's policies. Once that is done, we will be seeking RBI approval to restart the business.
This process has taken a little longer than we thought because there was a technology related issue. The technology took a little longer to actually build out than we thought.
Any stress in gold loan portfolio after RBI caution?
We are cognisant of the concerns that the RBI has raised. We are working to ensure that we are in full compliance. Our inspection and other teams are working to ensure that we do everything that the RBI needs us to do to remain compliant with the regulations. There is no material stress as of now that has to be reported.
Why has the CASA in percentage terms shrunk in Q2?
Interest rates on time deposits are significantly higher than interest rates on current account and savings account. Consequently, there is this tendency of the customer to shift from savings account to time deposit. The interest rate regime has stayed high and the cost of maintaining balances in non-interest bearing or low-interest bearing accounts is high.
Your deposit growth remained around 2 percent or below since last one year in every quarter...
We are not so hung up about growing deposits faster because this is the natural rate of growth that we can attain by keeping our deposit rates reasonably contained. We have the lowest cost of funds among our peer banks and we want to retain that advantage.
If we want to grow deposits faster, then we have to start competing for the deposit and we have to pay the market rate. This will ultimately increase our costs and impact our NIMs.
Of course, our business strategy for the near term is to grow the deposits by 10 percent a year and assets at 10-13 percent a year.
How the cost of funds have reduced by 5 bps in Q2 over Q1?
We were expecting a rate cut and consequently, we positioned ourselves in such a manner that our cost of funds started going down in advance of the changes to the repo rate and other such rates that the Reserve Bank may make.
Your focus now is on digital deposit...
We are already live with a fintech called Upswing. We are building the platform that enables us to hook up to other folks. We have a strategic alliances team that is working very actively to build more of these. We've incorporated ourselves into a platform that enables co-origination and something called MPOS that Northern Arc has built so that we can integrate once and other people can integrate into Northern Arc.
Will you go slow on business loans because of higher NPAs?
Most of the NPAs are coming from old portfolios. Even on the MSME side, it is the old historic book, which was underwritten at the branches and it was underwritten using different credit screens. We have completely revamped our underwriting systems and the organisational structure of how we underwrite. We want to aggressively grow this.
It's an area that is a work-in-progress and we are very confident that we'll be able to increase this business because this is where the spreads are and this is where we can build long-term relationships that can hold the bank in good stead as we go forward.
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