Cogencis, Friday, Jun 26
By Anshika Kayastha and T. Bijoy Idicheriah
MUMBAI – When Indian Overseas Bank's Managing Director and Chief Executive Officer Karnam Sekar hangs up his boots on Tuesday, he will do so with the satisfaction that he has turned the bank around and the confidence that the lender will continue to be profitable, going ahead.
"Going forward, slippages will be under control and ageing provisions will not be much, as the provision coverage ratio is very high," Sekar told Cogencis in an interview. "With these two reasons, and normal operating profit, we should be able to continuously show profit."
The bank reported a net profit of 1.44 bln rupees for the March quarter, the first quarterly profit in nearly five years. It hopes to exit the Reserve Bank of India's prompt corrective action framework after the current quarter.
"They (RBI) will have to examine and be convinced about the sustainability of the bank... it should not take very long. RBI should respond very fast," Sekar said.
The bank was placed under the framework in September 2015.
Q. With the return to profit in Jan-Mar, Indian Overseas Bank has met all three parameters under RBI's prompt corrective action. When do you hope to exit the framework?
A. We will have to initiate the process and write to RBI. They will have to examine and be convinced about the sustainability of the bank. The June quarter is coming to an end, so these results also we can conclude in a short time. Here too, we will follow the same route, we are clear about it.
It's a process. I'm not sure how long it will take, but it should not take very long. RBI should respond very fast.
Q. Are you convinced that the bank can continue to record profits in the coming quarters?
A. Yes. For the last 18 quarters, we have not been able to make a profit only because of the credit costs. But we have posted decent operating profit for a bank with our size of operations.
Credit costs have come down significantly because our provision coverage ratio on Mar 31 was 87%, which means that only 13% non-performing assets have not been provided for. This comes to 60 bln rupees, which will be provided for over two-three years, depending on the age of the loans. So, provisioning pressure due to ageing of loans will not be much for each quarter.
Slippages in corporate credit have been provided for, and in the last four-five years, we have not taken any fresh corporate credit. Therefore, there is no chance of getting fresh bad loans. Going forward, slippages will be under control and ageing provisions will not be much, as the provision coverage ratio is very high.
With these two reasons, and normal operating profit, we should be able to continuously show profit.
Q. Any concerns on stress emerging from retail, agriculture, micro, small and medium enterprise loans, considering the moratorium on loan repayments?
A. We analysed how the moratorium was moving from March to May. The number and percentage of people that have availed the moratorium--both in terms of portfolio size and amount--is actually coming down. That is a very gratifying and positive development.
In March, around 45% people opted for the moratorium but in April, the number came down slightly. So, we thought it was stabilising. But in May, it came down significantly and is now just 32%. This trend still continues, which means people who originally opted for the moratorium have now started repaying.
We will do the analysis for June in the next three-four days, but if the trend continues then by September, the number of people who have availed the moratorium may come down significantly. Further, not many retail borrowers are availing the moratorium. So, we don't see much impact on RAM (retail, agriculture, micro, small and medium enterprise) loans.
Q. Where do you see credit costs for 2020-21, based on recovery prospects?
A. We recovered loans of around 53 bln rupees last year. Recoveries have not been very robust in Apr-Jun because of the lockdown, but might pick up in the second half of this financial year.
That is why we have maintained the target for 2020-21 at about 53 bln rupees. That recovery is good enough for us because for every 100 rupees recovered, 87 goes to our profit. That is good.
Q. What is your sense on the loan growth for 2020-21?
A. June was muted except for some loans to micro, small and medium enterprises given under special COVID-19 schemes, and 10-15 bln rupees under government-guaranteed schemes.
It is difficult to say at this point. But maybe, some clarity will emerge by September. However, this year we will definitely be more focussed on growth than last year, when recoveries were the focus.
We are trying to explore home loans in tier-II and tier-III regions where we have good branches, and we expect to see growth there. Last year, we grew the home loan book almost 20%, including purchase of loan pools.
Q. Your CASA continues to grow as you shed bulk deposits, which helps with net interest margins. What would be the aspirational level for net interest margin for 2020-21?
A. In 2018-19, it was just 2.08%--one of the lowest in the market. This year, we made a conscious call on that by changing the customer profile, lending based on risk profile, and significantly shedding high-cost bulk deposits.
The current, saving account deposits ratio has gone up 200 basis points to 40%, and it is sustaining, even though it should have normally eased in Apr-Jun, because we didn't raise any temporary funds. With CASA funds sustaining, margins have improved every quarter, touching 2.30% in March.
By my standards, it is good. But by industry standards, it is not good at all. So, in the short to medium term, we need to have a target of 3%. That is our goal, maybe we need to take a hard call on interest rates.
Net interest margin is a serious cause of concern for the bank, but fortunately, they are improving. Even for Apr-Jun, rough estimates peg it at 2.30-2.35%. So, we should be able to reach 2.75%, if not 3.00% by the end of the year.
Q. Do you need to raise equity for growth? Since you have recently exercised your options on tier-II bonds, what is the strategy for 2020-21?
A. Our focus is only on capital-light assets. Fortunately, the RBI has recently allowed nil risk weights for loans to micro, small and medium enterprises,which have 100% government guarantee. Even if we grow this book by 40 bln rupees, it won't need any capital allocation.
Since we have strong branch presence in south India, especially Tamil Nadu and Andhra Pradesh, the gold jewellery loans portfolio is also sizeable, but that also doesn't need any capital. Within housing loans too, we have opted for the segment with 35-50% risk weights.
So, overall capital requirement is not much. But if required, we can go for a small tier-II bond issue.
Q. What is the plan for offshore operations, including the Malaysia joint venture with Bank of Baroda and Union Bank of India?
A. We are in discussions with Bank of Baroda for the Malaysia venture for a while. We will take a collective decision. Our investment is not much, and it is not going to make any significant impact on profitability. We will go with the other major banks, we can continue, or come out. It is not very consequential.
Our major operations are Singapore and Hong Kong, and both branches are doing fine. We have branches in Colombo and Bangkok as well, but they are not as big in scale. All four operations will continue and are profitable.
Q. How to you intend to bring down your cost-to-income ratio?
A. Costs have gone up because of provisions for wage settlements. I don't know when the settlement will happen. But we have made provisions at a certain percentage, and we think it is good enough.
We have taken huge cost-control measures in the last four-five years, and it has yielded results. However, beyond a point, I don't think you can work on the numerator, you have to work on the denominator. Total income needs to go up for cost-to-income ratio to come down.
For the first time in the last four-five years, the net interest income has shown an upward trend in Jan-Mar, and this trend will continue. Net interest margin is also improving. So, we will work on the denominator and as that expands, the ratio will get better. End
Edited by Maheswaran Parameswaran