Federal Bank has reported good first quarter results. Will you be able to keep the momentum going while tightening the policy?

I hope we can repeat this continuously. This will be the best gift we can give ourselves and make sure the stakeholders are happy. Our priority has always been to ensure that the asset quality remains strong. We do not want to compromise in this matter. And thankfully it is going well. during covidThere was some slowdown in growth as we tightened the norms. We didn’t want to take more risks. Now, as we see things opening up, credit demand is picking up. Customers, especially large corporates, are turning to banks for their credit requirement, unlike other forms of borrowing. This has been happening for the last six, seven months. And that’s one of the reasons why credit is growing so fast. Banks with clean balance sheets have credit appetite, risk appetite to meet this demand. The next few months will show whether credit growth at the industry level is going to be sustained at 14-15%. Our growth will certainly exceed the growth of the industry as it has been in the last quarter. For two consecutive quarters sequentially, we grew approximately 18%. In most of our businesses, we are growing into the high teens. So I think the momentum should continue. And usually the second half of the financial year is stronger than the first half of the financial year. So, I am hopeful that this year we will be able to register around 18-20% growth. The credit demand is quite broad based. It means that something fundamentally improved.

So, you would think that the tightening cycle will not hurt business expansion…

Look, some demand is inevitable, isn’t it? India is a growth market and needs to be nurtured. So corporates are looking for investment opportunities and capacity building as one does not believe that such tough times will last. And so as long as there’s some degree of predictability and visibility into demand, I think the investments will continue. And we must remember the fact that India may be witnessing a slower growth rate than expected. It’s not de-growing in any sense, you know.

We would have liked to grow at 8%. We can grow at 6.7-7%. The situation is certainly not the same as some other western or developed markets are facing. Demand may moderate slightly for the next quarter or two, but growth will still be north of 6.5%. So with the capacity utilization being 70-75%, we need to create new capacity. And the underlying consumption story hasn’t gone away, despite everything. If you look at July vehicle sales, you will notice that they are always at a higher level in some regions. I think the formalization of the economy is happening very fast. The informal sector may be struggling a bit more, but the formal sector, the big corporates are all witnessing consolidation in their own right.

Is digitization boosting the economy?

More and more digitization is definitely carrying stuff. Even marginalized people are flocking to the more organized sector. Of course, these are not instant. But it is becoming more and more visible that people are getting into the fold of formal banking and moving up the chain. Even people are entering the formal system through the NBFC system… even through it MFI Arrangement So you see all the banks and NBFCs and MFIs are still very positive about meeting the growing demand as the formalization is clearly taking place.

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

Yes we. At present our capital is close to 15%. Even if we grow at this rate over the next 18 months, we still have enough capital. Having said that, you know, we will evaluate at every level. But we have our own view that we are in a good place till the second half of the calendar 2023. But, if we continue to perform, I think we can attract capital, but I’m not even discussing it right now because we have that fairly well capitalized.

I understand you are planning to open some new branches this year. So, no matter how much we talk about digital, we still need a physical presence, right?
Because our approach was to use digital and utilize our existing branches to become more productive. At the end of March 22, when we presented our annual results, there was only one branch, which was not profitable. That too because he was at a far away place. So the branches became profitable and the productivity increased. That’s why we said, we should reinvest in the footprint now and while we’re consolidating digital and using various digital expansions. We said, we should open branches but make them lighter instead of branches of 2000 square feet traditionally. Maybe 800 square foot branches with two to three people for sales and service with all digital capabilities. In the last five-six years, we have added only 20 branches. We had 1250 branches at the end of 2016. This year we will be adding 60-odd branches.

Gold loan is one of your focus areas, isn’t it? Over the years, the space has been 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 NBFCs. Then banks came into it, banks like us. However, the customer segments for banks and NBFCs are reasonably fragmented. Banks usually go for existing customers. NBFCs target customers who may not be regular bank customers. But as I mentioned earlier, the line between non-bank customers and bank customers is getting thinner as more and more formalities take place. So the customers are now happy with the bank as the lending rates in the banks are relatively low as the cost of funds of the banks remained low in the last two years as other forms of credit were not increasing. Some participants began slashing prices because it was their only opportunity for growth.

Now as things are opening up and other forms of credit are coming up, liquidity is going to tighten up a bit, and you won’t see the kind of situation where gold loan pricing will be so tight. Having said that, I don’t know if you can go back to those 18-20% kind of yields. But it is still a very lucrative business because it is safe and it is reaching people who have no other form of getting credit.

As you said, banks are operating on very low margins. What is the rate that banks usually charge for Gold Loan?

Roughly mixed would be 10 to 12%. Of course there will be some products that cost less. There is a difference between a 90-day product and a 30-day product, but yearly, they would come in something between 10 and 12%.

I’d like to 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 reducing your stake in fedfina, What’s the situation now?
Fedfina is certainly looking for capital right now. I expect that during this calendar year or early next year, they’ll see a listing and we’re still committed to keeping above 51%. At present our holding is 74 per cent. So we will evaluate how much we will do as an offer for sale and how much we will dilute…

In Ageas Federal Life Insurance, we own 26% and Ageas has over 74%. We do not have permission to pursue it. Ageas is keen to make it on a large scale. And, you know, they’re putting more energy behind the company. I don’t see any capital action right now.

Other investments are in Equirus Capital and our own back office called Federal Operations and Services. Both are doing well and steaming well.

At one point, you were looking to buy an MFI to grow your rural footprint. Is it still on your mind?

MFI business is very lucrative. But, unfortunately in the last five-six years, something or the other comes – be it demonetisation or, you know, any recent event, covid, this business runs into a problem. So we are very careful, but we have a very good MFI portfolio. Therefore, for now the focus is on using our own partners, such as Business Correspondent Partners or technology-enabled MFI businesses. So till we get MFI of Rs 2000-4,000 crore available at a reasonable price, there is no point in going and doing it when we can do it systematically, quite strongly. So at this point in time, I’m not saying we’re close to the idea, but that nothing—what we want and love, and affordable—is not available.

Consolidation and privatization are the key words in the banking sector. How do you see it?

Consolidation should happen for two, three reasons. One is a common owner for public sector banks. So to that extent, the owner can decide how much they want to merge, which they have done. So, consolidation is an option. The second is privatization. Those are two different decisions. For the public sector banks, I think more than consolidation, now they will probably look at privatization. In private sector banks, the ownership is very different. Therefore, consolidation is a difficult decision for private sector banks unless it is a good option commercially, no one is going to sell themselves or buy someone else.