Demonetisation Led To Surprise Loan Repayments, Says IndusInd Bank
Even delinquent borrowers started repaying loans post demonetisation, said CEO Romesh Sobti
IndusInd Bank’s earnings for the quarter ended December 31 beat most analyst estimates. Along with beating expected earnings, the bank also defied expectations of a deterioration in asset quality due to the government’s demonetisation decision.
Some analysts had feared that the bank’s heavy exposure to commercial vehicles would lead to a slowdown in loan growth and an increase in delinquencies, as the sector is particularly dependent on cash. The government’s decision to withdraw notes of Rs 500 and Rs 1000 on November 8 had led to a serious cash crunch, which persists even today.
The bank, however, was surprised to note that asset quality in its retail business actually improved after November 8.
In fact there is a beneficial impact of demonetisation. Our delinquencies and slippages in the consumer bank have actually improved over the quarter, because repayments came in faster before December 30. Actually we were surprised to see delinquent clients also paying up, written-off clients also paying up.Romesh Sobti, CEO, IndusInd Bank
Even in the microfinance segment, which was viewed as a problem segment, IndusInd Bank began witnessing a normalisation in collections after the first four weeks, Sobti said.
The bank also managed to grow its loan book by 25 percent in contrast to a slowdown in loan demand across the industry. For the banking system as a whole, loan growth for the fortnight ended December 23 slowed to 5.2 percent from 5.76 percent during the previous fortnight, the slowest rate of growth in 25 years according to Bloomberg data.
According to Sobti, the bank’s diverse portfolio of products helped achieve the higher loan growth. Corporate advances during the quarter grew 25 percent for the bank, while vehicle loans grew 21 percent and non-vehicle retail loans grew 42 percent.
People assumed that loan growth would slow down even for us, basis the fact that vehicle finance had slowed down, microfinance had slowed down. Vehicle finance, apart from the first two weeks when we saw a drop in enquiries, it actually started growing very robustly. Quarter on quarter, our vehicle finance disbursements grew 12 percent. Most people assumed that vehicle finance would pull us down.Romesh Sobti, CEO, IndusInd Bank
Breaking Down The Numbers
IndusInd Bank posted a surprise 29 percent jump in net profit in the third quarter to Rs 751 crore, aided by strong core business growth and non interest income, as well as steady asset quality.
Consensus estimates of analysts polled by Bloomberg had pegged the private sector lender’s net profit for the quarter at Rs 727.6 crore, 25 percent higher than last year’s figure.
The bank’s net interest income, an indication of the performance of its core banking business, grew 35 percent to Rs 1,578.4 crore. At the same time, non interest income, led by distribution fees and income from trade and remittances, grew just over 21 percent to Rs 1,016.80 crore.
In fact, the management believes that if it was not for the Reserve Bank of India’s interim measure to raise the daily cash reserve ratio requirement for banks to suck up excess liquidity from the system, IndusInd Bank’s net interest income would have grown by another Rs 30 crore.
The bank’s asset quality during the quarter remained stable. Fresh slippages, the management said, stood at 1.1 percent of the loan book, the same rate seen in the previous quarter. At the end of the quarter, the bank’s gross non performing assets stood at 0.94 percent of total advances, up from 0.90 percent at the end of September.
The Surge In Deposits
IndusInd Bank’s deposits grew 38 percent during the quarter to Rs 1.19 lakh crore, led by a 56 percent rise in savings account deposits. This increase, something that most banks are likely to report, is a fallout of demonetisation. Estimates vary about how much of the money will remain in the system.
According to Sobti, the amount of money that moves out of these savings bank deposits will depend on the performance of other asset classes. He pointed out that debt-based asset classes were not as attractive as before because of falling bond yields.
Irrespective of how much remains with the bank, the movement of funds to other asset classes also presents an opportunity for the bank in the form of distribution fees, he said.
During the quarter, the bank’s distribution fees rose 44 percent on year to Rs 181.2 crore. A distribution fee is collected by the bank for selling products for mutual funds and insurers.
Sobti believes the trajectory of growth in the distribution fee income will remain constant or could even grow further over the next few quarters.
The bank is scheduled to review its marginal cost of funds lending rate (MCLR) on January 17.