Credit growth seems to be improving in the system. Are these two led by inflation or preference shift from bond to banking credit?
The answer is partly in the question. It has been the capacity utilisation, probably because it is at a level which is inspiring people to go out and do more investments that requires credit than the inflationary impact, then the fact that other instruments that were earlier a lot cheaper have come back. Lastly the bank’s credit appetite is also much richer, so I think the combination of factors that we have seen now for a period and more than 10% credit growth. I think from here it should be picking up and we are seeing signs of it already.
Let me talk about Federal Bank, in terms of growth, how is it that you see the bank and other large private banks for instance have been able to grow by 14% to 20% whereas Federal on a smaller base has grown 10%. How much faster than the industry can the bank grow going forward?
It is never a race to grow faster than somebody else, it is a race to grow good credit. Over a 10-year period or any slice of time which is longer, we have grown materially much better than the industry.
It is not a race, but it is flattering indeed. You must confess.
So, our choice is very clear. We will grow when the appetite is there and the credit quality in the market is in a good place because I do not want to be growing at some record speed and then facing a credit challenge, not long after.
That is why I said if you take any long slice of time we have grown materially better than the industry but our credit standards have been way better than everybody else’s. If we grew 10% last year but today, I am guiding for a much higher growth because we did see that post Covid, in certain pockets, there was some stress and we did not want to accelerate into that.
As we see things emerging much clearer and better, we are confident of picking up on that. I think this year we will see a much higher rate of growth and during Covid, we saw slower growth by choice.
I am quite optimistic about the growth opportunities; we have not lost steam nor have we gathered any bad credits along the way. I think we are in a good position to grow and remain well capitalised, I think we are in a good place.
In your recent interview to newspaper, you had said Federal Bank is factoring in repo rate going up a lot more for the next 12 months and you are working your plans around that. What exactly do you mean and what is in the offing?
At that point in time when we made that statement, the most recent policy announcement had not happened, but there is still a view that interest rates may go up. I have always said that the credit standards and credit quality is paramount, but we are in a place where we had tightened quite materially some businesses during Covid like retail. We slowed down both our credit cards and personal loan business quite materially.
As things have come back, we believe that is a good growth opportunity and these typically are price agnostic products. There is an opportunity to grow that. We had started businesses like commercial vehicles and commercial equipment but scaled it down as demand was much lower. That is the beginning to come back. I did mention in the earlier question that these are businesses that saw other ways to get credit and now they are coming back to the banks.
So, credit growth along these lines are positioned for growth and interest rate increase has some bearing but equally the inflation and other aspects are demanding more credit from banks. We are positioned just to keep growing in this quarter.
In the 1990s Bill Gates made a prophecy that the world needs banking, maybe not banks. In the last two years, so much was being said about fintech but fintech did not turn out to be the kind of threat to banks as was envisaged and banks like Federal Bank also stepped up the game with Fed-e-Studio. How big is it going to be for Federal Bank?
Our view on this for the last two plus years is that we have gone very big on fintech and continue to be quite bullish about that, but it has never been about that because they will take away business from us.
It is a collaborative story that is why we are the first bank to go with two new banks with the FPI on the credit card side and many other partners. We see that as a large distribution opportunity and the fintech partners get a banking platform. It is symbiotic now.
The relationship model that we have chosen is working well. Should they grow wings and become completely independent institutions of their own, is possible in the future but all pointers of the communications that have come from regulators suggest that they are quite comfortable with a partnership distribution kind of model because one has technology skills and banking skills.
That combination is where I visualise this playing out. I am not nervous that they will all become competitors by themselves and which is why we have got ahead in this fintech journey and I am seeing that gaining traction almost every passing week I would say.
What the market also wants to know is what is happening with succession planning and any changes at the mid-level management?
I still have a long time to go unless something you know or somebody else knows. But we are backed very deep, our team is very good, we have people at all levels. In fact, just two days ago, the board in Nomcom reviewed our entire succession across levels of the organisation. I think we are in a good place. We do not see any stress around, and you know this job is something that will be coveted by many, so I am not nervous about that.
Tell me about overall asset quality because your performance has been good, your credit cost is low throughout the cycle, you have managed to clock about 1% ROAs in intermittent quarters as well. What are your thoughts on increasing NIMs going forward? Which products do you think would help and aid this growth?
I think the ROAs are now at around 1%. We have been guiding for 10-15% improvement each passing year and that is going to be driven by both margin expansion by some of the products I mentioned like credit cards, personal loans, commercial vehicles, micro finance, and gold. All of them are picking up and growing quite nicely. As margin expansion happens, we are seeing it flow through to the ROA. Our belief is that products like this which we have put slightly on the back burner during Covid with our very robust credit standards and credit quality, are the opportunities for growth.
We are giving it a lot of impetus as we go into FY23 and beyond. We are already seeing that our own organic credit card distribution and our partner led credit card distribution are gathering steam., At a very small base, we are at almost a three-digit kind of growth rate. Personal loans had seen a slowdown. That is beginning to do quite well. Commercial vehicles are trending quite well. These are businesses that we have understood.
We have capacities that have relatively higher yield and within the risk appetite, I expect these to be the businesses that will step up and give us the margin expansion. In addition, our CASA continues to be very strong and robust and growing.
A combination of rising rates typically tend to be margin positive. We will see margin expansion, credit growth and hopefully it will flow through into ROA expansion