South India Bank to face pressure on NIMs amid RBI’s rate cut: CEO Seshadri

P R Seshadri, South Indian Bank

South Indian Bank is expected to face pressure on the net interest margins (NIMs) going ahead due to rate cuts by the Reserve Bank of India (RBI), said chief executive officer and managing director PR Seshadri in an interview with Moneycontrol.

“We will have continued NIM pressure in this quarter. It will take some time for this NIM to actually come back because the problem is that the External Benchmark Link Loans reprice immediately after the rate cut, whereas deposits reprice only on the maturity date,” Seshadri said.

He added that as the prices on the deposits repriced, the pressure will come down. In the April-June quarter, the NIM of the bank reduced by 23 basis points (Bps) on-year and 18 bps on quarter.

Seshadri also said that the bank had a series of communications with the RBI for the resumption of co-branded credit cards, and the bank have addressed all the issues that the central bank has pointed out. “The bank is awaiting RBI's nod to resume co-branded credit cards,” he added.

Edited excerpts:

How much growth do you expect in advances and deposit in rest of the year?

This year we want to grow over 12 percent on assets and deposits also in a similar way. We want to focus on the retail and MSME to get growth in the NIM. We change the structure of our balance sheet and reduce reliance on corporate. We built new systems, technologies, processes that enable our branches to deliver our products better to customers.

We are operating in a very dynamic environment and the repo rate cuts and the speed at which those have happened is exposing us to NIM pressures. In Q1, we were able to offset the NIM compression by very significant treasury related profits, but treasury profits tend to be volatile and cannot be relied upon forever. Hence, we have to increase our retail and higher yielding books that is the challenge that we have.

Which sectors will contribute to the over 12% growth in advances?

We are expecting majority of growth on retail, loan against property, housing, MSME business coming in.  We'll redouble on gold as we have clean up our gold portfolio and with this it will grow aggressively. All of this will help our book to grow more than 12 percent.

We don’t want to rely more on corporate, so we think that the corporate side will not materially grow.

How new gold loan norms will impact or help your bank?

The revised circular that has come up from RBI makes a distinction of loans below Rs 2.5 lakh and above Rs 2.5 lakh where the underwriting standards differ. Below Rs 2.5 lakh, there is no difference from our current process. Above this limit, there is a need to do some kind of testing to see whether the customer has the repayment ability or not, some form of credit underwriting becomes mandatory.

Our underwriting processes will have to change so that we can seamlessly do this. We are building new technology to do all of that. The second element is that they have introduced the concept of productive lending and non-productive or for consumption lending.

Productive lending, they are allowing higher LTV which they used to allow for agricultural loans in the past. Now that creates opportunities in urban India. Productive lending creates huge opportunities in urban India which we intend to take up.

What will be your strategy to attract more NRI deposits?

Over the last year, we have been engaging more actively with our NRI clients, we have a plan to do bunch of events. We try and engage with them. We have improved the convenience with which they engage with us. In the past, there were some items for which they needed to send their papers. The authentication of transactions for them was a little difficult. All of those things, one by one by one, we are solving.

More importantly, our face-to-face engagement is also improving. We have a representative office in Dubai. We are improving the quality and capabilities of our representatives there so that our engagement with our customers increases and improves. We are also in the process of understanding if similar offices can be established elsewhere so that this business can grow even more.

Do you think there will be pressure on the NIMs going ahead?
We will have continued NIM pressure in this quarter. It will take some time for this NIM to actually come back because the problem is that the External Benchmark Link Loans, reprice immediately after the rate cut, whereas deposits reprice only on the maturity date.

The other thing is the peak deposit rates have not come off as much as EBLR has come off. Our peak deposit rate earlier was 7.4 percent and now it is 6.7 percent. So those are all things that will play into banks' P&L and there will be pressure on the NIM for the present.

As the deposits reprice, this pressure will ease a little bit. Now, we are early in the cycle decided that we don't want to offer high rates for the long tenor deposits.

What is the status of your co-branded credit cards? Have you received any communication from RBI?

We have had a series of communications with the RBI. As far as we can see, we have addressed all the issues that the RBI has pointed out, and we are awaiting their confirmation that they are on the same page.

As of now, we think we have done everything that we need to. If there's anything else they need us to do, that also we're willing to do.