Federal Bank Does Not Have To Sell Family Silver, CEO Says
Not pursuing any M&A opportunity right now, Federal Bank says.
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While its larger rivals are selling non-core assets as they battle bad loans, mid-sized lender Federal Bank Ltd. says it is under no pressure to sell its “family silver”. The bank does not expect its non-performing assets to spike once Reserve Bank of India’s temporary relief on smaller bad loans recognition expires.
The bank’s loan book is well diversified, Shyam Srinivasan, managing director and chief executive officer of the bank, told BloombergQuint over the phone. The lender has low exposure to the steel sector, one of the largest contributors to Indian banks’ stressed loans.
Here are edited excerpts from the conversation.
After demonetisation, the Reserve Bank of India allowed a three-month window to not consider unpaid loans of up to Rs 1 crore as bad loans. Will NPAs rise after that?
We are reasonably confident that the improvement in NPAs that we have shown will continue.
Is drought in southern India a worry?
Yes, if the drought persists. But our loan book is diversified across geographies, segments and products. We I don’t have more than 25 percent exposure to a product or a segment.
Has the rise in steel prices and protectionist measures by the government helped bring down NPAs and increase recoveries?
We have also been reading about the steel sector picking up, but the on-the-ground impact is yet to show. Challenges for SMEs which have been suppliers or vendors to large steel companies still continue. I think the steel sector has seen the worst but is still not out of the woods. It’s not a worry for us as our exposure to metals is about 7 percent of the loan book.
Are you considering selling stakes in any non-core assets?
Not yet. Moreover, IDBI Federal Life Insurance Company, Cochin International Airport and Kannur International Airport (in which the bank has stakes) are neither listed nor is there a secondary market yet. And we have no need to sell our family silver.
What’s the outlook on credit growth and deposits?
The growth over the next three months should be similar to what we saw over the last nine months. We expect about 50 percent of incremental CASA (current account and savings account) deposits post-demonetisation to go away, down from 80 percent earlier.
There are 25 government-owned and 20 private banks, besides small finance banks and a multitude of foreign, cooperative and regional rural banks in the country. Is the sector ripe for consolidation?
This debate gets amplified every time there is a credit issue or a change in the (finance) ministry. There is always a case for the big getting bigger. With new categories of banks coming in, competition increases. Then there are banks which are under stress, so they want to either integrate or get taken over. I don’t think it is something that is going to happen in a hurry owing to the ownership, the level of capital, the level of stress, and geographic concentration. If it is under one umbrella, like State Bank of India and its associates, it’s different. Or in the case of public sector banks where a large part of their holding is with the government.
Is Federal Bank scouting for any acquisitions?
No. All our approaches are truly organic, but if anything comes up, we will certainly explore it. There is no significant opportunity that we are pursuing right now.
Being among the well-managed private sector banks, there could be a fair amount of interest in a bank like yours. Have you received any buyout interest?
We neither have plans, nor are we in talks.
Old generation private banks have survived economic cycles and retain their identity. The new generation private banks are aggressive on growth. What’s the difference in approach?
Every institution is created on the desire of growth. I don’t think it’s about new or old-generation banks. I think the distinction is more ownership as opposed to growth. Everyone thinks that the old generation is less ambitious. This a flawed assumption. We are very clear that we have a good opportunity ahead of us, we are relatively asset quality burden-free and happy to grow organically. If we find anything along the way, we will consider it.
Your thoughts on the idea of a bad bank?
The idea to carve out all bad loans and put them under one entity whose priority is resolution is very good. But it has a lot of structural, capital and administrative issues which are not easy to resolve. It is a good thing conceptually, but difficult to execute. But because we are confronted with a massive problem, it is worth exploring.
Is there is scope for the RBI to lower rates?
The inflation data suggests we may be done with rate cuts for a while. I don’t see the RBI reducing or even increasing rates in a hurry. Federal Bank is also unlikely to cut rates.