What is the immediate future of banking in the midst of all the turmoil? Where do you see South Indian Bank in the next few years?
When it comes to markets and the economy, it will largely depend on the state of war and its impact on inflation and the response of central banks to inflation. And that’s obviously how banks respond to interest rate hikes. This year has been quite good so far as compared to the first quarter of last year as the same period last year was completely washed out due to Kovid-2.
However, we need to rethink our liability and asset strategy after the two-phase repo rate hike. We also need to restructure our growth plans as rate hikes affect different customer segments differently.
The central bank is forecasting a GDP growth of 7.5%. One has to see if there is a further fall in GDP estimates as rates may go up further. Overall, banking is expected to grow by 12-15% if GDP grows by about 7%. That’s what we see – banks are growing at almost twice the rate of GDP growth.
At South Indian Bank, we had a legacy book with a lot of crime issues. The slippage was very high in the last two years. We have tried to address this – we have created new verticals, created recovery teams, restructured assets – all these changes improve banking parameters such as Casa (Current and Savings Account), Capital Adequacy Ratio (CAR), Asset Quality etc. I wouldn’t say we’re completely there now. As we experience changes in the economy, we need to work hard to ensure that these do not affect our plan to take our bank to the next level of performance.
As I explained in the strategy document for the bank in 2020, our CASA should be more than 35%, CAR should be more than 15%, gross NPA (Non-Performing Assets) should be less than 4%, Net NPA should be less than 2%, Cost to Income ratio should be less than 50%, Asset book size should be more than Rs 1 lakh crore. These are the milestones that I expressed. But with covid-1 and covid-2 and its subsequent impact on the economy, our wealth growth will resume, and I hope that with all the efforts and support to the economy, we will be able to reach 1 lakh crore in a year. Will aim to reach Rs. Original commit time. But everything will depend on how the economy progresses. This is not a number that is cast in stone. But as a bank, we aim to grow at least 10% this year. This was reported when the economy was projected to grow at 8.5%. Although the GDP estimate was revised downwards, we still want double-digit growth.
As per your vision document, when are you looking to achieve the target of Rs 1 lakh crore?
until March 2024. Now it may take a year or more. To be honest, it’s pretty unexpected to talk about what will happen two years from now. It’s also very difficult to predict a year from now. Last year in February-March people were worried about the economy coming back completely, but April-May-June due to Kovid-2 completely washed away in terms of lending.
You talked about concerns about your legacy book. how big was it? where are you standing now?
See, in October 2020 when I started my journey in this bank, I had a book worth around Rs 65000 crores. I had to do a lot of restructuring. We brought in changes in the liability structure, branches, sectoral structures, we brought in changes in the asset structure and all this we did with the help of external consultants. There was a decline in the beginning and by the end of March 2022 we had created new books worth Rs 22000 crores, taking the overall book to Rs 61800 crores.
As of 2020, due to the concentration of large exposures, there were problems related to corporate books. Subsequently, due to the floods in Kerala, the SME portfolio also had some issues. In FY21 and FY22, we had a shortfall of around Rs 4400 crore mainly in the SME and retail sectors. Corporate book concerns have been largely settled. Our incremental look book is fairly stable.
Is the worst-case scenario behind you in terms of asset quality? Are you looking forward to a fresh fall this year?
We have also done a good job in collection and recovery. In FY22, we upgraded and recovered NPAs of around Rs 1500 crore. Last year also it was Rs 600 crore. Our recovery and upgradation was about two and a half times larger last year than last year. So, with aggressive improvement we expect the problem book to come down significantly as we will also have the benefit of adding new books which we added last year. Because last year we had only five to six months’ work. The first half was completely washed out due to Kovid-2.
Coming back to your specific question, the fresh fall is estimated at Rs 1600-1700 crore for the full year. I have restructured books worth Rs 2400 crore and I anticipate slippage of about 25 per cent of it. And from other books, I am expecting a slippage of around 1000 crores. These numbers are estimates. We’ll see how things unfold as we move forward.
In which areas do you see the maximum potential for credit growth?
We will be moving across business lines. Clearly, with the base of our personal loans, credit cards etc being at a lower level, the growth in these sectors will be higher. But the corporate books are definitely growing for us. We are yet to see a reversal in the SME book, which was reduced last year due to high run-down and unutilized limits. Gold loan business is also doing well.
In about three to four years, the entire book will be brainstormed. We have already churned for a year and a half. Out of Rs 61800 crore, about Rs 22000 crore is on account of new loans. As I am talking to you, Rs 8,000-9000 crore has already been disbursed this year.
As of now, our gross loan book is Rs 64500 crore from Rs 61800 crore at the end of March.
Though your bank is slowly turning around, you didn’t have much to say in terms of profitability before the fourth quarter (the bank reported a profit of Rs 272 crore as against Rs 7 crore in the year-ago period) … is Q4 just a – closed position? What is your future guidance?
Actually, the signs of the changes we are making are being seen from the very beginning. So, your observation about Q2, Q3… is really looking at the bottom line. We have declared losses so there seems to be no improvement. Clearly, the losses were due to the extraordinary provision we made to improve our PCR. Our PCR was below 60% which has now increased to 70%. There is no point in booking profit and paying tax if PCR is low. The whole idea is to improve the fundamentals of the bank.
Capital Adequacy Ratio which was sub-13% has now increased to 15.9%, PCR which was less than 60% has now improved to close to 70%, PCR net of write-offs from 32% has now increased to 52%, our Gross NPA was 8% which has now come down to 6%, Net NPA was close to 5% and now it has been brought down to below 3%. So, we have shown improvement in every single parameter. This is despite having historically been the most slippery in the last two years.
I’m not saying we can repeat the Q4 profit numbers. What I’m saying is that Q4 gains are indicative of a number of changes that are happening and that led to a lot of growth in various sectors that led to profitability conditions. For example, the NIM (net interest margin) increased from 2.6% to 2.8%.
Since you are targeting double digit growth, do you need to raise capital?
I am not ruling out raising capital this year. If there is an opportunity, the market is favourable, we may explore raising equity this year. It needs to be increased but we have to give it due time. We will increase it in installments. Rs 500 crore is enough size to start with.
Though we have taken approval for raising capital in any form, the preferred option is to raise equity. We will consider debt only when raising equity is difficult or not possible.
As you say the worst is behind you, would you consider geographic expansion?
Once I see consistency in my performance then maybe I will start doing that. That’s when we see good profit levels at least for a few quarters. I want the cost-to-income ratio to come down to a comfortable level. So, do I want to spend more money and set up 50 or 100 branches right now? My answer would be no. Because there is a productivity that we can get from our existing network. Secondly, with the entire banking journey going digital, it is not necessary to have a frank branch presence. Today I want to save my capital.
Are things stable in South Indian Bank?
This is a journey. As we have been discussing, all parameters have shown tremendous growth… development at whatever stage they were. Can they be compared with the best in the market? Still need more travel. For example, our CASA has increased from 25% to 33%. I’d probably go up to 40%. Similarly, our gross NPA level, we were at 8% and now we are at 5.9%. But obviously we have to bring it down further. The journey to strengthen the organization will continue.
But we are no more vulnerable as we were at a time when our capital adequacy was very low, PCR was low, NPA was high, skill level was low. He’s behind us all. We have achieved stability but yes, there is scope for further improvement. I continue to raise my own benchmark on what I want to achieve in the bank.