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Home > Finance News > Federal Bank MD Shyam Srinivasan is bullish on India’s consumption story, sees lender’s credit growth higher than industry’s

Federal Bank MD Shyam Srinivasan is bullish on India’s consumption story, sees lender’s credit growth higher than industry’s


India is a growth market and so corporates are looking for investment opportunities and capacity building because nobody believes that tough times will last long, said managing director Shyam Srinivasan in an exclusive interview with ET’s Atmadip Ray. The bank itself is targeting 18% loan growth. Edited excerpts.

Federal Bank has reported good first quarter numbers. Will you be able to continue the momentum given the policy tightening?

I hope we can repeat that consistently. That would be the best gift we can give ourselves and ensure that stakeholders are happy. Our priorities have always been to ensure that the asset quality continues to be robust. We don’t want to compromise on that count. And thankfully that is holding quite well. During Covid, there was some slow down in growth because we had tightened the criteria. We didn’t want to take more risks. Now, as we see things opening up, credit demand is picking up. Customers, particularly large corporates, are shifting to banks for their credit requirement, as opposed to other forms of borrowing. That has been happening over the last six, seven months. And that’s one of the reasons credit is growing reasonably fast. Banks with clean balance sheets have credit appetite, risk appetite to fulfill this demand. The next few months will show whether credit growth is going to sustain at 14-15% at an industry level. Our growth will certainly be higher than the industry growth as it has been in the last quarter. Sequentially for two successive quarters, we grew about 18%. In most of our businesses, we are growing in the high teens. So I think that momentum should continue. And typically the second half of the financial year is stronger than the first half of the financial year. So, I’m hopeful that this year we will be able to register, you know, near 18-20% kind of growth. Credit demand is quite broad based. That means something is improving fundamentally.

So, you think the tightening cycle won’t hurt business expansion…

See, some demand is mandatory, right? India is a growth market and needs to be fed. So corporates are looking for investment opportunities and capacity building because nobody believes that these kinds of tough times will last. And so as long as there is a certain degree of predictability in demand and visibility in demand, I think investments will continue. And we must remember the fact that India is only probably seeing slightly slower growth than expected. It’s not in any sense de-growing, you know.

We would’ve liked to grow at 8%. We might grow at 6.7-7%. The situation is certainly not anything like what some of the other Western or developed markets are facing. The demand may be slightly muted for the next one or two quarters, but still growth will be in the north of 6.5%. So with capacity utilisation being 70-75%, we need to create new capacity. And the underlying consumption story has not gone away despite everything. If you look at July vehicle sales, you must have seen they are at all time high in certain areas. I think the formalization of the economy is happening quite fast. The informal sector may be struggling a bit more, but the formal sector, the bigger corporates are all seeing consolidation into them.

Is digitisation helping the economy get steam?

More and more digitalization is certainly moving stuff. Even the marginalized are coming into the more organized sector. Of course, these are not instant. But it is more and more visible that people are coming into the fold of formal banking and going up the chain. Even people are getting into the formal system also through the NBFC system… even through the MFI system. That’s why you’re seeing all the banks and NBFCs and MFIs are still quite positive about meeting growing demand because the formalization is visibly happening.

As you are targeting 18% growth, are you capital ready for this?

Yes, we are. At this juncture, our capital is close to 15%. Even if we grow at this rate over the next 18 months, we have sufficient capital. Having said that, you know, we’ll evaluate at every stage. But our own vision is that till the calendar 2023 second half, we are in a good place. But, if we continue to perform, I think we can attract capital, but I’m not even discussing that yet because we are reasonably well capitalized.

I understand you are planning to open quite a few new branches this year. So, however much we talk about digital, we still need physical presence, isn’t it?
Because our approach was to use digital and use our existing branches to become more productive. At the end of March 22, when we produced our annual results, there was only one branch, which was not profitable. That too because it was at a distant location. So branches turned profitable and productivity picked up. So we said, we must now reinvest into the footprint and that while we’re strengthening digital and using various digital expansion. We said, we must open branches, but make them lighter rather than conventionally 2000 square feet branches. maybe 800 square feet branches with two to three people for sales and service, with all the digital capabilities. In the past five to six years, we had added only 20 branches. We had 1250 branches at the end of 2016. This year we would be adding 60-odd branches.

Gold loan is one of your focus areas, right? Over the last couple of years, this space is getting crowded and lenders are operating with tight margins, which some say may not be sustainable in the long run. What are your thoughts on this?
Firstly, this business was largely dominated by the NBFCs. Then banks got into it, banks like us. However, the customer segments for banks and NBFCs are reasonably segmented. Banks typically go for existing customers. NBFCs target customers who are probably not regular bank customers. But as I mentioned earlier, as more and more formalization is happening, the line between non-bank and bank customers is thinning. So customers are happier with the bank now because the lending rates are relatively lower in banks because the banks’ cost of funds remained low in the last two years, because other forms of credit were not growing. Some of the participants started shrinking pricing because that was the only growth opportunity

Now as things have opened up and other forms of credit are coming up, liquidity is getting slightly tighter, and you will not see that kind of situation where gold loans will be priced so tightly. Having said that, I don’t know whether you can go back to those 18-20% kinds of yields. But it is still a very attractive business because it’ secure and it’s reaching out to people who have no other forms of getting credit.

As you said, banks are operating at a very thin margin. What is the rate normally banks charge for gold loans?

Roughly blended will be 10 to 12%. Of course there will be some products which are priced low. There is a difference between a 90-day product and a 30-day product, but annualized, they will come to something between 10 and 12%.

Let me ask you about FedBank Financial Services (FedFina) and your other subsidiaries… How do you plan to prepare them for the future? You are already in the process of diluting your stake in FedFina. What’s the status now?
FedFina is certainly looking for capital right now. I’m hopeful that sometime in the course of this calendar year or early next year, they will look at a listing and we have still committed to hold above 51%. Right now our holding is 74%. So we will evaluate how much we will do as an offer for sale and how much we will be diluted…

In Ageas Federal Life Insurance, we are holding 26% and Ageas has taken over 74%. We don’t have approval for taking it up further. Ageas is keen to build it to scale. And, you know, they’re putting more energy behind the company. I don’t see any capital action right now.

The other investments are in Equirus Capital and our own back office called Federal Operations & Services. Both are doing well and are picking up steam quite nicely.

At one point, you were exploring buying out an MFI to grow your rural footprint. Is it still in your mind?

The MFI business is very attractive. But, unfortunately in the last five/six years, something or the other comes in — whether a demonetization or, you know, any of the recent events, Covid, this business goes into a problem. So we are very careful, but we’ve a very good MFI portfolio building up. So, right now the focus is to use our own partner, like business correspondent partners or technology-enabled MFI business. So unless we get Rs 2000-4,000 crore MFI available at a reasonable price, there’s really no point in going and doing it when we can do it organically, quite strongly. So at this juncture, I’m not saying we are close to the idea, but nothing — what we want and like, and affordable — is available.

Consolidation and privatization are the buzzwords in the banking sector. How do you see this?

Consolidation should happen for two, three reasons. One, for public sector banks there is a common owner. So to that extent, the owner can decide how much they want to merge, which is what they’ve done. So, consolidation is one choice. The other is privatization. They’re two different decisions. For the public sector banks, I think more than consolidation, now they would probably pay attention to privatization. In the private sector banks, the ownership is very disparate. Therefore, consolidation for private sector banks is a difficult decision unless it’s commercially a great choice, nobody’s going to either sell themselves or buy somebody else.



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