Shyam Srinivasan, MD & CEO of Federal Bank, foresees a positive shift in the bank's margins in the upcoming fiscal year, FY24. Srinivasan has confidently given a guidance for margin expansion to grow by 5-7 basis points.

Below is the verbatim transcript of his interview with CNBC-TV18.

Q: Let me first start with the qualified institutional placement (QIP) or it was our story. We heard that the subscription was six, seven times, is that right?

A: It has been almost like a T20 match, so a lot of build up to it and it turned out to be really exciting. When we set out as you mentioned last year, in the AGM, we had an approval for up to Rs 4,000 crore of capital raise. We did two parts one is a QIP for Rs 3,000, the other Rs 1,000 is in the process of getting completed, which is you may have also seen that there's a preferential allotment to International Finance Corporation (IFC). So an existing shareholder looking to take up a higher share in the bank and we are quite excited by that.

On specific QIP like you mentioned, I think the subscription for the Rs 3,040 to be specific, we had bids closer to 20,000 crore. So it's quite an exciting one and I had done one in 2017 when we received I think close to 2.5-3 times I thought that was good. This time, it was quite encouraging, exciting.

Our objective was very clear, we did want a wider range of investors to look at us, and we did want people to think of us as long-term and not short-term. We did want a mix of domestic and foreign. I am happy that — you would have seen the list that has been put out. I think the process got completed late last night. So the shareholders have got their shares and they are hopefully happy shareholders or will be very happy.

It has been a nice and encouraging mix of people who are long-term shareholders from outside India, from domestic, from the large mutual fund houses and what was most encouraging is the bids that came in were hefty, and quite contested for. So we did have a brief moment of can I get more kind of moment. More people asking us can I get more of your — which is, I think a good sign of confidence that the investors have placed in us. So all in all, it's a good one and start to finish it took us about maybe five, six weeks. But we are where we are today.

Q: If you could just throw some numbers, where does this take you in terms of net worth, in terms of capital adequacy ratio (CAR) more than anything else – capital adequacy?

A: At the end of the June quarter, we were close to 14.8, this will add another 1.4 percent so we will enter 16 or so. And when hopefully the pref process will complete on our AGM or around that time once the regulatory approvals and the shareholder approvals come, it will take us to mid-16s. So that was one objective.

The other part of the question was on QIP per se - a mix of investors have been like I mentioned both overseas a domestic good breath of investors.

Q: Now, what do you do with the money? Are you expecting that you will be able to do much faster growth, do you have an internal target in terms of advances growth?

A: No, I think the capital raise was to support the growth we have been talking of. We have been low last few quarters if you have seen sequentially growing 4-5 percent. And this quarter that went by, we registered a growth of about 20 percent year-on-year and sequentially about 4 percent and Q1 is seasonally a low quarter but we saw hefty growth. We believe that the 18-20 percent odd growth that we are seeking to do is going to be aided by this.

Q: Would there be more risk weighted assets (RWA)? Is that also part of it because you brought down our RWA?

A: The RWA shift between one quarter and the other I did explain on air, was only because of a timing difference. There were some unrated customers who just got rated or added on, so it was not a risk profile didn't change. It's just a timing issue. But the larger point is, our risk appetite is fairly framed. We don't want to sort of suddenly because we have more money take higher risk right. I think to guide an 18-20 percent growth we needed a certain capital adequacy. We hit the triggers, our internal triggers of CET-1 is in and around 13, we need to look for a new capital raise. So over the last 10-11 years, if you have seen Federal Bank, which you have, we have been quite stringent about raising money. We have done one QIP in 2017, and one pref in 2021, these are the only two.

Happily this time, we did both on the same day and for that Rs 4,000 crore amount and this is only to enable the 18-20 percent growth that we are visualising over the next three to four years. Our belief is this should keep us going for the next maybe three and a half, four years, if we grow at 18 percent. And put back the profits that we will hopefully keep making and the last year was good.

Q: Where do you see growth, which are the areas that are asking for loans?

A: I think our approach has been retail, wholesale, sort of weighted 55-45, retail, 55, wholesale 45. We don't want to stray away from that. Within that there are growth pockets. If you take our retail book, it's largely a secured book, we have a very small unsecured, when I say unsecured credit cards, personal loans and to some extent businesses like microfinance, gold, commercial vehicles, these are businesses that we have just about started. So if you take the last 18 months, these have grown at high double-digit high means like 40-50 percent growth, but they are growing off a very small base.

On the whole, as an aggregate unsecured is about less than 3 percent of our overall outstandings. We believe in a three year phase as this growth will dictate unsecured part of retail will be probably what 10-15 of the whole book. So the growth opportunity, we are 1.2 percent share of credit market, I don't think we need to take crazy risk in any one area to grow. And that has been our model. We have moved from 0.76 percent share of assets to 1.25-1.3 so gaining share. I believe we can go up to 2 percent share without taking any disproportionate risk and still be rewarded for that.

Q: So with the current risk matrix itself 18-20 should not be challenge?

A: We should be able to do.

Q: People are talking about a lot of AI, because of the digital footprint, perhaps that is now available. Some chairman and you may have seen them in other media as well, saying that I am more confident of my unsecured than my secured, you don't want to go down that path?

A: It is not like going down the path. I will tell you. I did start my career in unsecured. So I have a feeling these look good in good times. So you can't get too carried away. But the issue in unsecured is not lending. The issue in unsecured is collecting. So if you don't have the collection infrastructure because per ticket is few lakhs or few thousands, you can't put an army to collect that. So you have to use technology, you have to use science, you have to use data, to ensure that you are collecting. And that is an institutional capability that doesn't get built overnight. So you can't buy that capability off the shelf.

So I do think organisations that are stepping up on unsecured are ones who have established that capability for long many years. Relatively late entrant needs to be quite thoughtful about how much of your book has to be unsecured and how fast you want to grow in unsecured. Knowing that we have been calibrated. I am saying still we are growing 40-50 percent but on a very small base. So I am happy for that growth. But it should not dominate the overall book for any bank I mean, that is our approach.

Q: There is one person who is going to applaud you for this answer and that would be Reserve Bank. They have been cautioning banks and NBFCs about the unsecured space. You may find some money coming in your way because you are also looking to list Fedfina. Any timetable you have in mind after all the market is in a giving mood. So would you speed it up?

A: On Fedfina there we have 74 percent and our partner True North has 26 percent. The company is doing well and growing, they need capital for their growth. So the capital issuance which is likely to happen in the foreseeable future is to raise money for the company to run. The offer for sale (OFS) part which either us or our partner does is a more demand of the partner, their fund may have six year horizon so they may have a higher exit plan.

Q: But you are doing an OFS I thought?

A: A smaller component. So the component that we get as an OFS is very minimal. We still at this juncture are a large investor, we think our investment, and there is something for the long run. So there is no monetising plan on that. The company is doing well, we want that to grow. And over passage of time, we will see, at this point in time, True North may do a higher part of that.

Q: So I should not mix it up with fundraising. The other talking point for all banks is going to be net interest margins. We know that one big bank is taken on a huge asset in the form of HDFC, though when we spoke to HDFC, they said we have not raised our deposit rates. Nevertheless, there is a competition for deposits. So do you think for the system and for yourself, margins now have peaked?

A: I think last quarter, and Q1 of FY24, and Q4 of FY23 were our quarters where we saw the margin contraction happened and we had guided for that. In Q1 post results we have said, we have a line of sight, all things being equal our margin expansion from here on will start only because the way we have structured our book, and our ALM and our repricing and our transference of rate increase or decrease to the client has a different model. So we believe in FY24, here on all things being equal, no rate increase or no rate decrease, we believe our margin expansion, which we have been guiding for a 5-7 basis points improvement from where we are, is very likely and that is our conviction, because book structure allows us to do that.

Q: Can you elaborate a little more? Is it that you have a lot of EBLR loans, which we will start getting priced higher?

A: We do all our rate transmission T+1, so we do technically ours maybe one quarter or 90 days ahead of the other bank. If Bank A or B or C they may pass their rate increase or decrease T plus 90 or T plus whatever the cycle is, ours is T+1 — to that extent the rate transference is immediate from us both on the asset and we have a savings which is linked to repo. So the rate transference on both instances are happening.

As we plot out our term book, we see the incremental rate of growth of deposits and what price points that incremental deposit is coming in, how are we priced our one-year term, large part of term book is always one year, we believe our margin expansion - expansion in the sense - the contraction that happened, a part of it will get released. It is not like above the peak rate, it is just that comes back.

The second point on the term is that we have not raised our savings rate. In fact, through the cycle, our savings rates have been at the lowest end, 2.5 now 3.5. So we don't pay and that is not our business model. But we do have a large franchise which is very retailed in nature, our deposit structure you may have noticed is significantly retail.

So we have a customer at the other end which is the individual and we are blessed with a very good non-resident franchise and we have been working very hard to preserve that and gain share. And the Reserve Bank's recent choice of withdrawal of the Rs 2,000 note also threw in some plus for the market. There was some deposit accretion that happened and all that has increased the flow of money.

Credit creates deposits. If credit is growing 18-20 percent which it has been for the big banks and at an industry level in the mid-teens, deposit creation is following. So I think in my judgement, I hope I am right. The worst part of the deposit accretion challenge has moderated. You will see and I fondly and strongly believe we will see an increase in deposit growth as it is visible. And the two big banks HDFC and SBI between them, they anyway grow two lakh crore a quarter deposits, and we have been gaining share. So means there is momentum in the markets. That is what I would believe.

Q: So we just got the press release that you have announced a very interesting NRE product for women. Now, why would a savings account for women be different? And what are you planning to net with this product?

A: I also believe that in gender you don't have to discriminate on products. But here it's a positive discrimination. It is just me that segment requirement, gender is incidental.

A programme that we started 10 years back called Mahila Mitra, targeted women customers, domestic or non-resident, and there is an element in the non-resident which is important. At some point in time, many of our non-resident customers were male living in the UAE, Middle East. Their family members in India who were the recipients of the remittances and they needed some privileges not just to consume but also kept as bank products in the bank.

So we thought to address that audience. If the family member is male and outside and the spouse is living in India, invariably the spouse is taking care of the children, the elders in the family. So they needed a more bespoke solution for their requirements for India use. That gave us an opportunity to say with the advancement in profile of non-residents and we have also thankfully increased our dispersion across the UAE and the Middle East largely where we've got more high net worth customers coming in who have now started demanding saying we need the same privileges as my spouse is getting in the airports or whatever. So one led to the other. It's not like born yesterday, it has evolved.

So the NRE Eve+ product is quite exciting. We had a client at the launch event and when she spoke I almost thought I should have made her the product manager. She made such a compelling speech, she spoke about features that even I didn't know that the product had. So the product is bespoke, it's tailored for the premium needs, it has offers which are linked to what typically women want to use, but I think the thing that caught most people's attention is the offer to go to lounges across the world.

Q: These are very attractive. Those of us who even rarely go abroad, the fact that it gives you a lounge access is a big attraction.

A: Yes. I would only say domestic lounges are no longer attractive, it is international lounges which attract because domestic lounges are crowded.

Q: To come back to the card issue. This is very incidental. The Reserve Bank of India has put out a draft for discussion with the bank’s managing directors or bank management's that credit cards should not have exclusive arrangements — like you can’t be only giving Visa or only giving MasterCard or whatever. I don't think anyone has exclusive RuPay, but do you think that this is something which banks can be disadvantaged because you may have a very attractive tie up with Visa or MasterCard?

A: I think in the long run it will normalise. These things have only point in time impact because some bank may have been very advanced in their relationship with one franchise and may have embedded relationships, contracts. But once a rule is set everybody has to step into it, there is not much you can argue against. In the draft stage we can present but if it becomes a rule it becomes the rule. So I would think it will get normalised.

In the new world — none of the franchises may like it because the branding behind is less and less relevant because features are getting commonplace. I think client experience is going to trump everybody over everything else. So the brands in my view are going to be built by client experience.

Q: Lifestyle may have a pull, like you said using an airport lounge in Dubai or in London may have a pull.

A: Correct but if that feature gets replicated by everybody else, then it is not and that is why we chose the line — “Digital At The Fore, Human At The Core.” In fact, our annual report which is coming out tonight, it is about humanising banking. Our whole team is humanising banking, whatever it is – Rishta Aapse – we want to reinforce that.

You can poll youngsters around on the human touch, in fact, the campaign is not created by us, it is created by the younger officers. They are the ones who are representing us.

Q: The other thing that Reserve Bank has put on the table is expected credit loss. Now, I don't know how quickly they will go because they have to take the entire banking sector along, but if it were to be April 2024, would that mean an increase in provisioning?

A: What we have understood is, it is likely to April 2025. But I think for most banks, at least the ones who have enough data of the past, we've been submitting our expected credit loss (ECL) data to RBI for now three years plus. So I would think the impact will be quite modest. On capital, it may be 50-60 basis points. Taken across five year period it won't be material.

Q: How is the capex cycle looking? You said that the worst of fighting for deposits probably is behind us. Do you think there can be loan undercutting? Or is there enough demand for everyone? Is that a pressure on margins is my point?

A: See if there is a convergence to better credit rated customers, they will dictate pricing.

Q: So AAA will always dictate?

A: I think one of the publications had a yield bar by rating band. So it's evident that AAA is around 7.5-8.5 percent, AA is 8.5-9.5 percent. Within that 7.5-8.5 percent depends on relationship pricing. Customer is also aware of all the progress in the market. They have alternate instruments, but I think the demand is genuinely there. There will be some war for good client pricing. But if we who are one 1-1.2 percent share player are able to grow at 20 percent by distribution, the best banks are all no less and all are seeing growth. Also it is not growth where some other form of money is getting substituted, it is more bonafide credit growth.

So we are all quite encouraged by the news flow that there is new capex coming, green shoots coming.

Q: Are you seeing it?

A: I'll tell you our own example, in the Q1 that went by and even the 25 days of this quarter, we have a hierarchy of loan approval mechanism in the bank, right up to my board committees. At my level, as my committee we met maybe in one month six times already. At my board level committee, we met maybe three times, this is in Q2. In Q1 we met like maybe 12 times, so there are proposals coming in now. All may not get approved, all may not meet our standards or we may not be able to price attractively but I'm saying that much activity is there.

Q: How does this compare with the normal like say a year ago?

A: Much higher. Last year was good, the previous year it was like just out of COVID. So we were just beginning to see that traction. FY23 was the year when we saw maximum action. I'm seeing that repeat in FY24 which is what gives us the confidence that there is momentum in the market.

Q: This is unimpeachable proof of the India growth story?

A: Absolutely. In fact, that was my message to our shareholders. India growth story looks quite promising.

First Published:Jul 27, 2023 11:33 PM IST