NPAs in education loans one-off blip; consumption loan demand continues: Federal Bank CEO Shyam Srinivasan


Old private sector lender Federal Bank expects to continue its credit growth momentum at 20 percent and hopes to tide over the baggage of the one-off non-performing assets (NPAs) spike with better recoveries and demand from the consumption based economy.

Talking to Moneycontrol, Shyam Srinivasan, CEO and MD of Federal Bank said he aims to continue focus on recoveries, capitalise on its retail liability franchise and lending to secured working capital book.

Srinivasan has been with the bank for over 8 years now and is leading the Kerala-based bank since 2011.

The bank reported a 26 percent growth in net profit of Rs 260 crore in the quarter ended December 2017, driven by 22 percent growth in loans, which helped the bank tide over lower treasury income, which halved to Rs 58 crore

Although NPAs for the bank increased largely due to education loans, it was helped by recoveries and upgrades doubling to Rs 220 crore.

Excerpts from the interaction:

What drove the profitability in the third quarter?

Growth in interest income was at an all-time high on the back of consistent credit growth of more than 20 percent…we also enjoy one of the best liability franchises which is largely retail and our cost of borrowing or cost of funds is less than 5.74 percent, among the best in the market. So with credit growth which is continuous and cost of funds relatively under control and our recoveries and upgrades this quarter being very strong, the consequence was interest income went up and operating profit also grew.

The only dampener was the trading gains in the treasury book was Rs 50 crore lower than the previous quarter because the yields moved up too much.

What helped the recoveries amid the ongoing insolvency cases?

Recoveries and upgrades doubled for us at Rs 220 crore for the quarter which for the corresponding quarter stood at Rs 110 crore. A concerted focus helped, also most of our book is secured and so to extend the securities it takes about 9-12 months, so it is a maturing portfolio and it benefited us.

Also, we have very few cases among those under insolvency which is also provided for over 60 percent.

Your retail NPAs grew largely due to trouble in the education loan segment. Can you throw more light on it?

Retail loans saw slippages due to NPAs in the education loans which took a hit because of the Kerala State government dispensation on education loans (up to Rs 4 lakh). So most borrowers wanted to benefit from that and hence were reluctant to pay their contracted dues and were waiting for the subsidisation. But because we saw it past due, we had to recognise it as NPAs.

But this is a one-time hit and should end pain by January end. This is also for just the below Rs 4 lakh category of loans and also education loan is not a large part of our total book. So we will be more selective and will do for higher education and good institutions only.

Do you think job market weakening also led to it?

There are certain institutions like a lot of private engineering colleges which have probably not done a good job and recruited students wrongly and not been able to honour the promise of good quality education and thereby no placements to the students. Hence, I will not blame the job market alone but the institutions. A lot of times, it is also the greed of the institutions that leads to this. So it is a combination of both.

Have we seen growth in capex as observed by other bank chiefs?

Federal Bank is picking up market share and has seen good growth. At an industry level, we did see growth closer to double digits but it is working capital demand is and we have not seen much growth otherwise. Demand continues to be in the consumption sector and not so much in the manufacturing sector, it is still warm and not burning hot. We will wait for the Budget. It should then pick up from the first quarter of next financial year (starting April). So it is still six months away.

Your outlook on NPAs?

I don’t see major challenges in NPAs for our bank and we have been fairly steady if you take away the one-off blip due to education loans. Slippages has been broadly in sync with our credit growth. For the industry also, it may have bottomed out.

And credit growth outlook? 

For the bank, credit growth should be 20 percent and the industry will be around 10 percent as it is beginning to show signs and Q4 is traditionally a strong quarter. So we will grow double the industry growth and it will begin momentum and sentiments will look positive from thereon.moneycontrol