Focusing more on lending to MSME units as they fetch better margins: IDBI Bank Deputy MD
IDBI Bank wants to put its money where its mouth is. Over the last two years, the public sector bank has taken a calibrated approach to growth, focusing more on the bottomline than the topline.
In an interaction with Business Line, B.K. Batra, Deputy Managing Director, said his bank is focusing on lending more to micro, small and medium enterprises (MSMEs) as they fetch better margins. In the case of large corporates, that typically drive a hard bargain on interest rates, the bank is laying more emphasis on earning fee-based income by offering services such as trade finance, debt syndication, treasury and cash management services.
IDBI Bank’s position as it stands today
Today, we are the sixth or seventh largest bank in terms of size. If you look at our financial parameters over the last four-five years, they have been consistently improving, whether it is in terms of profitability, current account and savings account (CASA) ratio, cost-to-income ratio, and employee productivity. Where we stand today, we are really a combination of the strengths — solidity, solvency, trust and inherent government backing — of the public sector and efficiency, fast turnaround time, customer-centricity, good range of products and services of the private sector. We offer certain things which others may not have — like we have the capability to provide advisory services, debt syndication services, which not all banks provide. We are quiet up-market in treasury services and trade finance services, on par with any private sector or foreign bank. In all the areas where we are working, we keep on benchmarking ourselves and trying to make improvements in processes, turnaround time, refinements in products and services. We survey and re-survey the needs of customers and accordingly respond to their needs.
Has the bank attained critical mass?
We certainly have the potential to grow faster. But at this stage we are focusing more on profitability. Over the last two years we have followed the strategy of calibrated growth. Before that we followed the strategy of aggressive growth for three continuous years when we were growing at over 30 per cent. Then, we slightly changed tack and realised that we needed to consolidate, have a re-look at our systems and strengthen them because we had grown at a fast pace. And we needed to re-evaluate and look at our systems so that they are on par with the growth that we are handling. So consciously for the last two years we have been following a strategy of calibrated 15 to 16 per cent growth, on an average.
Why this controlled growth strategy?
We still are behind many of our peers in terms of profitability, and the differentiation in strategy flows from this. If you have to improve profitability then you have to be selective in growth, in picking up clients and loan proposals. We should be doing business which gives us better margin. We should be focusing on those areas which contribute to higher margin.
So we are focusing on the micro, small and medium enterprises (MSME) segment where the funding need is large and where people are prepared to give us higher margin. In the process, we can also improve our NIM. Similarly, amongst the mid and large corporates we are going in for such bundle of services where we have to give lesser fund-based assistance and more non-fund based assistance. Since corporates are aggressive in negotiating interest rates, margins for banks are lower. But then we can charge them for services such as trade finance, debt syndication, treasury and cash management services. So, we earn more fees and less interest income from corporates. On CASA growth
We focus on raising more low cost — current account and savings account (CASA) — deposits so that our overall cost of funds comes down and net interest margin (NIM) improves. If you are focused on profitability and NIM then your volume of lending cannot be very large. Towards this end, we are consciously making do with lesser growth in fund-based services and higher growth in non-fund based services; higher growth in CASA (so that we control our costs); and wherever we give fund-based services, we focus more on those clients from where we will be able to get higher margin.
On branch expansion and customer focus
We are adding branches every year. Currently, we have 900 odd branches and we are planning to add 150 this year and maybe a total of 500 in the next three years. The normal contribution towards CASA from each branch is getting added. But at the same time you need to deepen your existing customer base by engaging them so that they have more balances in their savings bank and current accounts. So, customer relationship management and customer value management become important in respect of all these clientele.
I must admit that it continues to be sluggish because the demand has slowed down on the consumer as well as investment side. Credit growth this year has been subdued vis-à-vis last year. So far this is the trend that we are seeing. But one is optimistic that if the climate for investment improves in the next few months then the demand may also start improving. It is basically going to be driven by investment demand followed by consumer demand.