PSB mega mergers would benefit us in the short term: Shyam Srinivasan, Federal Bank


Near term, these are good opportunities for us to turn our attention to getting business when others are not in their finest fettle, says Shyam Srinivasan, MD & CEO, Federal Bank. Excerpts from an interview with ETNOW.

I am just going to start off by talking how you are the first one of the first private sector lenders to link your savings deposit rate with an external benchmark. So far, a lot of your peers have been a little bit apprehensive. Why do you think they are averse to this and what is going to be impact on the banks?
I will go back almost two plus years when we first started linking our asset products to the external benchmark. We used either the repo with the spread or the 90-day table that we found fairly effective and we became quite competitive in certain segments. Over the last two years, almost 20% of our credit book has been built on link to external benchmarks. In December last year, we launched a savings product which was exclusively linked to a blend of external benchmark plus the internal rates. We had some experience over the last two years and the trend now is clearly the regulators are keen that we do link everything to external benchmarks. We have come out effective yesterday September 1, linking our savings products to the external benchmark.

In many ways, we have been trend setters on this account and I am happy that we could launch it yesterday and probably other banks will follow. We see the transmission being more direct and if the cost of funds go down, it will play through in the lending rates. It is probably the new structure of the industry and we are quite at the forefront of it.

What is going to be the impact on your margins?Do you think you will see your net interest margins maintained at 3.2 to 3.25%? How will your cost to income ratio be adjusted?

The margin expansion is not just one aspect. This, if any, helps ensure that there is no compression in margin because we have already dropped our lending rates to be comparative. It helps us keep our cost of funds relatively lower compared to what it may have otherwise been.

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We have guided for the margin somewhere in the 3.20-3.25% range if we are lucky in the course of FY20 that we are holding. A cost income is a function of so many things. I do not think it is just lending rate or deposit rate, it has a big bearing but there are so many other aspects but on balance, our guidance for the year has been 3.20-3.25% margins and cost income roughly about 49 or so. Those holding out with or without these measures, will ensure that we are able to transmit rates both on the assets and on the liability side. It does not have a significant bearing just yet. We will see how it plays through over the coming quarters.

Just wanted to understand what are the trends with regard to slippages, particularly when it comes to SMEs and corporates that had seen a rise in the first quarter? Has this stress been well contained? Has there been any notable recoveries that you would like to highlight?
Are you mentioning this for the industry or for Federal Bank?

For Federal Bank?
Our corporate slippages have never been very bulky and we are not linked to the NCLT or the IBC process. We do not have really any of those names then or now which are going to be either hurting us or suddenly rewarding us. Our slippages for the last five years have been around the same band. Ours is the only bank that has never crossed 3% gross NPA through any cycle and I believe that our retail and SME have held out within the band. I see that happening even in this quarter.

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Our full year guidance on recoveries and slippages, looks quite what we thought it would be in the beginning of the year. I am not signalling anything very different from what it was at the beginning of the financial year.

You have earlier guided for an ROA of 1.2 to 1.25% versus 1.02% in Q4 FY19. Are you on track and if so, what are the key monitorables you are looking out for?
The only thing you miss in this is that 1.2-1.25% was FY21. right so we have taken 0.76-0.881, 1.12-1.25 as the five-year ROA roadmap at end of FY19 we were at 1.02, Q1 was the same number. We believe if all goes well FY20 should be 1.12% and thereafter one leap will take us to 1.25%. Monitorables are all of the above — NIMs, cost income, slippages and we will hold ourselves accountable for performance and delivering that through the year. We have stayed away from all the noise in the market irrespective of happenings. We believe we should be able to hold and deliver.

I get that but when I say monitorables, is there something which could impress or depress the targets that you are working with?
The mix of products when you begin a year and we are watchful of the way the market plays out. Thankfully, we have diversified our portfolio between retail, corporate and commercial banking/mid market — all almost equally weighted. We are dialling up retail just now because there are pockets of opportunities. We have scaled up our skills, there are others who are either distracted or just not in the market. It helps us grow those businesses. You would see marked progress on businesses that are highly secured like gold loans. For about three-four years, we had sort of cooled off. But now we see a big pick up in that business. Our data base, mining base cross sell for personal loans, auto loans are doing well.

Those should give us some sort of lift in the relatively higher margin business but we are scaling down some of the lower margin currently stressed corporate kind of business. So the portfolio mix those could turn out to be upside but we will have to see how the year shapes up.

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What do you make of the recapitalisation as well as the big PSU bank merger? Would you say that it is a considerable threat at all to private sector lenders and can both coexist happily?
The first thing is we have to look at is whether it is good for them. I guess overtime as the consolidation brings in some synergies and benefits, they will get sharper. In the near term, these are all opportunities for banks like us. When the SBI subsidiaries mergers took place, it give us some substantive opportunities to go out and grab share. When the other banks which merged last year, it gave us some opportunities to go and get business because whatever happens, the distraction is there. They may box it off, fence it off, there is bound to be distraction and I think those are remarkable opportunities for banks like us.

The universe is the same, the players are the same it is just that the constitution changes. I do not believe constitutional change can give near term benefits to anybody. If anything, we should look for opportunities. In the long run, I am sure these are going to be more powerful larger engines of growth but that is at an economic level. I have to be selfish and look at what is good for our bank. Near term I see these are good opportunities for us to turn our attention to getting business when others are not in their finest fettle. As I said, gold loan business have picked up the last three to six months because others are a little busy with other stuff. I would see this happening going into the next 12-18 months.





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