Formal economy getting more digital and transparent for lenders… there’s clarity in credit book: Federal Bank MD

I am inclined to believe that this is one of the better phases for the Indian banking system. In any system for credit growth, lenders need to have confidence that there is a fair amount of transparency of data, information and client discipline so that the money given away is recoverable. If you see the last 5-7 years, that has become much better than ever, both on corporate and on retail loans. If you’re taking money from me, there’s a good chance that I can scrub some verified database to know whether you are a bona fide borrower or not. Earlier, it was all with a lag.

The appetite of lenders has increased because with the passage of time, more provisions have been made, there is clarity in the credit book and there is confidence that if you give money there is a fair amount of transparency of data. I think it is a fundamental change in the economy that has happened. I’m not saying this for our bank but this is a universal truth.

So, I am seeing that even in FY’24, credit will grow for the country between 13 and 14 per cent. If that happens, and it is showing signs of it, then I think banks like us should grow at 20 per cent.

Do you think RBI may increase interest rates if inflation remains firm?

If you see the last CPI data (August – 6.83 per cent), it is still higher than the RBI’s comfort level but is trending in the right direction. If you remove some seasonality of inflation, which has driven food prices up, there is some moderation. Will the interest rate start coming down in a hurry? The answer is that it may take a while. But the likelihood of it increasing has tapered down.

Generally, in a lending or a borrowing situation, it’s not about whether the rate of interest is high or low, it is the fear that the rate will go up. So, the first thing that the borrower and lenders need to know is that there is a certain degree of stability that is coming. This will introduce confidence. If you are living in a spiralling interest rate scenario like in Turkey or in Israel then there is a concern because then it’s a runaway inflation problem. I don’t think India is anywhere near that.

Again, oil price is at around $94 per barrel but up to $80-85 per barrel, India is always insulated. Oil has been bought at $45, $50 or now at $94 per barrel. I think the weighted average oil price (for the full year) will be fine. In case oil goes to $100 or $120 a barrel, there will be some consequences but that will play out in the following financial year. I think the overall economic management of the country is good.

Do you see rural demand picking up?

Rural (demand) has come back. While August rainfall was not good, September rainfall has covered up some of the gaps. The numbers and commentary by some of the fast-moving consumer goods (FMCG) players such as Hindustan Unilever, Dabur and Colgate-Palmolive, which are a good index of market sentiment, seem to suggest that it (rural demand) is good.

Nearly 70 per cent of my footprint is in semi-urban and rural, and we are seeing demand for some products continue. The more branches we open in locations that are relatively far from top-tier cities, the faster the growth is there.

The formalizing of our economy is happening. GST revenues are going up every month. As a bank, the thing that pleases us is the availability of information and data. If I am filing GST, I am leaving a digital footprint. So, the formal economy is suddenly getting more digital and, therefore, more transparent for lenders.

There will always be some challenges in a few sectors, but on balance, rural demand is picking up. In any financial year, the second half, where there are more festivals and more economic activity happens, rural (demand) picks up.

How do you see margins?

Margins will be a fight for everybody because more formalisation (of the economy) means more competition. The tough part of the formalisation (of the economy) is that there will be a squeeze on pricing. This means that it has to drive efficiency. If I was selling (a product) to you at a spread of 10 per cent, now I will have to sell it to you at 8 per cent, which means I have to improve my efficiency as a bank. This is where technology comes in. Those who adopt technology and are using it better, can distribute better and keep their margins slightly up.

In our last investors call, we shared that we are hoping that the worst of our fall (in net interest margin (NIM)) is over and we should be able to get to 3.20 or 3.25 per cent kind of NIM.

Banks are now focussing on retail credit in a big way. Is there any chance of a rise in delinquencies in the retail loan segment?

Today, there is an availability of a lot of information because of credit bureaus. Even credit monitoring and collection standards are improving. Importantly, most retail customers, the younger ones particularly, don’t want to have an impaired credit history because if they have an impaired credit history, they can’t take a car or home loan in future. These sets of customers are somehow managing.

Unless job losses happen massively, I don’t see this becoming a problem. Will there be some pockets of pain? There may be.

How is your unsecured loan performing?

Our unsecured book on the retail side is about 4 per cent, which is a very small part. For a long period of time, we were less unsecured and more secured products such as home loans and loans against property. Only in the last two or three years, we have entered into credit cards and personal loans. At this point in time, our credit card and personal loans portfolio is Rs 5,000 crore as against our total loan book size of Rs 180,000 crore.

Are you seeing any signs of stress in your unsecured book?

No. Unless you go crazy on the risk profile, like if I start lending to everybody who has got a 680 (credit) score and start giving a credit card, it will mean something. We only give pre-approved or pre-qualified loans. We don’t do new-to-bank origination. We originate only from existing customers or databases we pre-qualify. So, to that extent, the filtering is giving us comfort. Our model, at this point in time, is a little more conservative as we are a new entrant.

From October 1, Tax Collected at Source (TCS) under the Liberalised Remittance Scheme (LRS) is proposed to be implemented. Is the bank ready for the new regulations? Do you see any impact of this?

The bank is technically ready… that’s not an issue. Remittance volume in India is growing increasingly but the nature of the remittance behaviour is changing. Earlier, if Rs 1,000 came to India, maybe Rs 20 would go into deposits and the remaining into many other things. Now, if Rs 1,000 comes, maybe Rs 10-12 is going into deposits and the rest is going into construction, investment into the business, paying off earlier loans, starting new businesses, for family and buying of property. The change that has happened is because commercial (investment) is more attractive for a person to invest that’s why they are sending money to India. So, I would think any new change will not dramatically alter.

Earlier, when money came into India, one of the drivers for it was the interest rate arbitrage. There they were getting 2 per cent and in India, they were getting a higher percentage. Post Covid, interest rates have become higher in other countries. Over the next one year, you have to see how interest rates behave overseas. The day interest rate differential (between India and other countries) is not very high, many may rethink their strategy (to send money to India). So, it (flows into India) is not entirely tax-related but also related to the opportunity here (in India) and the rates there (outside India).

What is your view on deposit rates?

I think the likelihood of an increase is lower, and the likelihood of it falling, in a hurry, may take time. It will continue for a quarter or two, depending on what the Monetary Policy Committee (MPC) makes the decisions on the repo rate.

How do you see the entry of fintechs in the banking sector? Are they taking away your business in any way?

We are collaborating with them (fintechs) and they are collaborating with us. We never call them competition. We work with numerous fintechs and have partnerships for most use cases.

In the Indian banking system, fintechs cannot do much themselves because they need a banking partner; banks need the technology and last-mile distribution that the fintechs bring. So, if we see them as a collaboration, then it is a great opportunity. Our bank has taken the lead on that front. We have created an architecture which helps fintechs work reasonably seamlessly and fast. We are investing in that. Today, if you take any category, and look at fintech partnerships, Federal Bank will stick out as probably one of the top few in the partnerships.

You are completing 13 years as the bank’s MD& CEO this month. How have you seen the bank evolve?

Our aim has been to be the most admired bank. We have set that goal because it keeps us restless. Even if we become very good, it is not enough. And it’s not just from a stock market point of view, but we want all stakeholders such as customers, the board, the RBI, employees and shareholders to align with us. We have a very tall goal and against that goal, we have a lot of work to do. Have we moved? Yes. So, I feel good. I keep saying I am happily dissatisfied, and I will remain happily dissatisfied.