Synopsis
"On the consumer side, credit card spends have never been so good. The credit card spends continue though the revolving rates are very low right now and in the SME and the MSME side, there is enough demand to cater to the market. Large corporates are showing green shoots specifically in the cement and steel industries. The public capex cycle will lead to the private capex cycle," says Sumant Kathpali

"In the domains where we specialise, which is 45-48% of our portfolio, we will grow higher than the market and gain market share. On the consumer side, we will grow higher than the market which is the non-vehicle assets. In the MSME and the SME side, we will grow higher. On the large corporate side, we will go in line with the market or may be a bit higher than the market," says

Credit growth now seems to be coming back. I was looking at the latest data. The growth is in double digits now. There is a year-on-year and a sequential improvement. Do you think the trend is going to extend itself or is this a one-off that we got in terms of the last credit growth number?

If you look at us and what we are seeing in our portfolios, I think growth is coming back very strongly. When we talk to OEMs, specifically the commercial vehicle side of the business, we find that there is huge buoyancy on the CV side after three years of decline. If you look at commercial vehicles , the peak medium and heavy volume was about 3,20,000 to 3,30,000 vehicles. We were down to about 120-130 last year and in prior years, we were down to 220 to 230. We believe that the cycle has turned. In April and May, we have seen a huge buoyancy in sales and the OEMs are also feeling the same.

The demand is back on the vehicle side of the business. Even tractors which had a little bit of a slowdown in February and March have come back very strongly in the months of April and May and are looking good. Our scooters are coming up, used car sales have gone up. The car industry is doing well and hence the all around buoyancy. If you go into the deep rural sector of the country which is microfinance, the demand remains.

It is very good out there as for 45 days there were no disbursements but that demand is very much there and it is for us to capture that market. On the consumer side, credit card spends have never been so good. The credit card spends continue though the revolving rates are very low right now and in the SME and the MSME side, there is enough demand to cater to the market. Large corporates are showing green shoots specifically in the cement and steel industries. I think the public capex cycle will lead to the private capex cycle.

Between FY16 to FY19, the loan growth of IndusInd Bank was about 29%. During FY19 to FY22, it was 7.8% and it was way above industry average of last five years. Now, it is way below the industry average of last three years. Will the trend grow higher than the industry average between FY23 and FY25?. I think the public capex cycle will lead to the private capex cycle.

In the domains where we specialise, which is 45-48% of our portfolio, we will grow higher than the market and gain market share. On the consumer side, we will grow higher than the market which is the non-vehicle assets. In the MSME and the SME side, we will grow higher. On the large corporate side, we will go in line with the market or may be a bit higher than the market.

Having said that, we have not given guidance for the next three years but this year for the PC-5, we expect growth to be between 16% and 18% CAGR and because we were very low last year and the prior year, one should expect us in early 20s this year and going up as we move forward.

The cost of bulk deposits is going higher. The cost of loans, the cost of CASA is going to go higher. In the first phase, banks will be able to protect their margins but what happens after NIMs get affected?

Go back to 2014 and you see a 300 bps increase had happened and the impact on bank margins. I think banks have been able to pass the cost and while the cost of deposit is increasing, please understand banks have three levers. One is they pass on the floating rate book very nicely and it is a 90-day reset and that is not a problem.

Second is the fixed book also gets repriced and there is a rundown if your average tenure is about 24 to 28 months, you have 30-32% of your book running off every year and you are repricing and your disbursements are getting repriced at a very high pricing.

The third and which is very important is if you have a CASA and a term deposit which is granular, what will you do? The renewal of term deposits does not happen immediately. New incremental deposits may come at a little bit higher price but that does not mean that everything gets repriced and the margins get managed to a large extent. There may be a three to four bps here or there difference but over four quarters, we will see the margins come back.

Axis Bank suddenly has acquired the Citi credit card business and Max Life insurance business; a big merger is happening between HDFC Bank and HDFC Ltd. What is IndusInd Bank planning?

There is a time and there is a moment to create. We have to look at inorganic growth in three ways. It has to be complementary to our business like the commercial vehicle and microfinance businesses are complementary to our business. It should create a new line of business Diamond and we are number one in Diamond. Third, it should be ROA accretive and should not dilute the existing shareholders in a big way.

I think we want to add a food domain. We are evaluating our fourth domain, we want 50% to 55% of our business coming out of our domain and we will see it but at the right moment and at the right time. You will see prices taking a hit and the valuation has to be right and the moment has to be right for us to acquire something at that point.

Most of the banks are of the view that they need to scale up their mortgage business, the home loan business. It is a low margin business but it is an anchor business. What are you planning to do to scale up that business?

We are into two businesses in mortgages – one is in the affordable housing where we have a Rs 2,000-crore book and we have always made our intention clear that we are scaling this business and this year as well as in the next three years, we will see that business to be Rs 10,000 crore is a sizable market size in that business.

On the mortgage side, it is not an ROA accretive business. It is an anchor business and with our urban strategy and granularisation of liabilities playing out, we are entering into mortgages. You will see the entry in Q2 of this year and we will not be a big player but we will be a relevant player in the mortgage market.

I am going to quote your numbers verbatim, Q4 slippages were at 3.7% of the opening advances versus 4.7% slippages in Q3. Will this number be closer to 3% when FY23 ends?

We have given guidance on our credit cost and slippages. In the first year of my business, we were at 370 basis points. We went down to 280 bps and this year we should end at 120 to 150 bps of credit cost. Do not look at gross slippages because we have a restructured book which will move into gross slippages which are already provided. So for the sake of the investors, we will show the restructured book's and the normal book's slippages separately. The normal book slippages are where it should all belong and it is well within the range which we want it to.

I would like to revisit the promoters' commitment to increasing stake. When we spoke to Mr Hinduja , he said as a promoter I can tell you that I am going to quote him here that the stock price of IndusInd Bank is not cheap, but very cheap. But I have not heard promoters committing to any capital after that.

We have always that the promoter will put in the capital and that is IIHL (IndusInd International Holding Ltd), not Mr Hinduja. IIHL will put in capital as and when the bank needs the capital and at this point of time, we are well capitalised. Our CET is 18.6% and our CET1 is 16%. So I think we are very well capitalised.

Second, the operational guidelines for increasing the stake to 26% is still not out and as and when it is out and if we need the capital, we will activate that.

Third, I would always like the promoter to come from the primary market and not from the secondary market.

One of your main differentiating mainstays has been your focus on the diamond/jewellery business. Internationally things are changing, locally things have changed. Walk us through that important business vertical of yours.?

This business is about 4% of our book and continues to perform well. It is about Rs 11,000 crore of books. We never had any SMA-0, 1 or 2 up till now. With the macro situation and the war in Russia-Ukraine, 30% of the stones which come into India come from Russia. At this point, that business is a little bit disrupted not from a credit point of view but from a growth point of view. I see the growth coming back in the second half of the year but as of today, we are maybe growing at about 10-11% instead of 18-19%. We only do working capital loans and we do not have any issue on our credit quality.

So the growth of 20% plus what you guided for does include a slowdown which possibly could happen because of the Russian business?

Absolutely right. There are new boosters to the business which we have added and that is what you need to take. So the BAU business will always grow at 16% to 17%. There are new growth vectors which we have added and one of them is the merchant acquiring business in the rural areas and we believe that it is a unique business where we offer the payment solution, the transaction account and the loan to the client.

We have a Rs 2,000-crore book at 23%. We believe this book will end at about Rs 4,000-5,000 crore this year and move to Rs 20,000 crore in the next three years. It is a very strong business and we have tested and piloted it for two years. We believe it really augments our distribution in the rural area to a large extent.

The second business which we are adding is the mortgage business is an anchor product but creates a very good annuity and a support to the urban side of our business.

The third business which we have added and we have scaled up is the tractor business and we now have a 9% share in the tractor business. We want to move to 11-12% and that is doing very well. It comes at a yield of 16% and, of course, we are scaling up our unsecured business which we have not been very good in scaling up.

Do you see the capex cycle getting affected because of international factors, high inflation and sudden spike in interest rates?

While the country is not isolated, if one looks at what the finance minister and the governor said, they have a twin objective. The twin objective is to control inflation and boost the growth and in my opinion the capex cycle will not get affected. It may get delayed by maybe one or two months but I do not think at any point of time, the growth of this country will get affected because of inflation or because of external factors. The capex cycle will not get affected.

So do you see requirements for both term loan and working capital coming back and increasing?

It has come back. You yourself are talking about a double digit growth and data show that May was better than April and June will be better than May. The demand for term loans as well as the demand for working capital is very robust, specifically in the mid and the MSME segments.

The market is just not ready to recognise the good work you have done and I wonder why?

It is about getting consistency in your execution over a period of time and getting your financial metrics above a certain benchmark. Please understand that if you look at the Q4 results, we were 1.5% ROA with the banks which are sitting at 2% and they were all banks which are doing 2.2-2.3%. The bank has to continuously show an improvement and say the credit cost is coming down.

Look at vectors like ROA. Is it moving in the right direction? Is the credit cost moving in the right direction? We are coming from a high credit cycle and we are now going into a low credit and a normalised cycle. But is the growth coming back? You rightly said we have not had growth and we were not even in double digit numbers. If the growth goes above 20%, we will start seeing value. Also, bad news has affected our business. We have been in the news for all the wrong reasons.

Will this be the year of the test of your liability franchise because now interest rates are moving higher, there is increased competition, there is a fintech bubble which has got pricked? A lot of dynamics are changing?

Well change has always happened. India is a growing market in liability and everybody will need a part of it. Just to give you our perspective, we were growing our liability business by 40,000-45,000. To get to our numbers, we have to grow at 60,000-62,000. So please understand the perspectives are different in different organisations.

When you talk about liability franchise vis-a-vis the competition, please understand every bank has its own initiatives backing the liability and every bank has its own distribution backing the liability. For example, we are not a big player in the metro market, in Mumbai, Kolkata. Yes, we are there, we are relevant but if you go into the home markets, we have more than 4% share of liabilities where we would only be less than 1% in the metro market.

Every bank has a very different strategy to mobilise liabilities and the quantum of liability which it has to mobilise is a percentage of what it is wanting to do in its business. I do not think this is such a big issue because some banks are merging and some banks are getting aggressive. Every bank was always aggressive in the retail granularisation and it is not new. Yes, sometimes we may have to garner more but it does not mean the other banks will get left out. The market is big enough to adopt, to accept everything.

We are just in the first phase of interest rate increase. At what juncture do you think the interest rate increase could potentially be challenging NPAs again? How far are we away from that?

We have to watch the inflation because I think the inflation mandate is strong. We have to watch the external markets and the macro across the world as to how it is playing out and I think that will decide what could happen. I think the market has already built in another 50 to 75 bps of interest rate hike.

Beyond that, we have to see and if the fuel price continues to rise and the inflation is not under control, then there will be different measures at that point of time . The government as well as the regulator has always acted in the best interest of the country as well as the financial institutions and clients. So I think we will have a very good outcome.

During Covid, everybody said the whole thing would collapse; it did not collapse because the policies and the framework which was defined was very acceptable and was very forward looking to a large extent and had supported the banks as well as the clients. We do not have to jump to conclusions. We have to wait and see what is happening in the world as well as in our country. I think the government as well as the regulator will take the right calls.

Courtesy: ET Now