Federal Bank delivered a strong operating performance in the September quarter, thanks to good growth in core net interest income and improvement in cost-to-income ratio. The bank has been cautious in growing its loan book, focusing on high rated corporates and retail loans. Strong deposit base, healthy liquidity ratios and prudent provisioning are key positives for the bank. According to Shyam Srinivasan, MD& CEO of Federal Bank, the demand is back in most segments to 85-90 per cent of pre-Covid levels, and they are seeing far lower takers for restructuring than envisioned earlier. Edited excerpts:

Has demand come back to pre-Covid levels? Do you think the recent pent-up, festival demand is sustainable?

Retail part of the demand is still holding out. Though it may be slightly lower than the peak festive demand, it has not petered out in November. If we benchmark the demand to January (pre-Covid levels) then for most of the loan categories we are at 85-90 per cent. For Federal Bank, in particular, the home loan and vehicle loan segments are about 90 per cent of pre-Covid levels and we should exit the fiscal at levels seen at the start of the year.

Larger corporate segment is a different situation altogether since the demand there is choppy. Also, there is now intense pricing competition in the corporate segment — banks pursuing high rated corporates. Every bank is flushed with excess liquidity and hence the price war in the good rated corporates continues to be intense.

But since deposit rates are low, spreads remain healthy.

Federal Bank has been a strong player in the SME segment. What has been your experience of the stress in the small to mid-businesses segment?

So, there are two categories here. First is the set of companies that witnessed stress post Covid. For such businesses, there have been several relief options such as the Emergency Credit Line Guarantee Scheme (ECLGS). For those companies that were stressed prior to the pandemic, and the stress has only worsened, they may have limited options and have to look at alternate solutions.

The good news from the pandemic experience is that many corporates have managed to honour dues without moratorium which is indicative of their strong business models. The financial discipline has been visible even in the relatively stressed segments.

How many loans have you disbursed so far under the ECLGS scheme? After the recent tweak in the scheme to widen the coverage, do you think there will be a substantial increase in loans under ECLGS?

So far, we have disbursed about ₹2,000 crore under ECLGS which is about 60 per cent of the borrowers eligible under the scheme. We do not expect a significant jump in disbursements under the revised version of ECLGS. It could go up to about ₹2,500 crore.

Did you find many takers for the restructuring scheme?

Interestingly, restructuring demand continues to be modest. And I don’t see it change dramatically between now and March. So, there are two ways to look at it. If we see reasonable bounce back in the economy, then many may not seek out restructuring. If the economy does not show sustained recovery then companies may see stress increase but may not meet the prudential norms of the restructuring criteria.

Hence, this is why the restructuring universe is turning out to be much lower than what everyone anticipated at the start.

For us in any case exposure to the stressed hotel, travel and entertainment sectors is negligible.

Federal Bank had made an additional ₹400 crore of provisions in the September quarter (over and above ₹186 crore in Q1) to deal with Covid related stress. Will this suffice then, given the restructuring trend? What about slippages in the second half?

On a conservative basis, we had factored in about 3 per cent of our loans being restructured (₹3,000-odd crore). However current run rate suggests that it will be lower than that (about 1.5 per cent). Of course, we have to watch out for trends until March, but as of now it appears that we are adequately provided for.

Slippages can be at an an outer range of about 30%-40%, (for a couple of quarters) higher than the pre-Covid run rate as mentioned during our post results update.

In the September quarter, Federal Bank witnessed robust growth in gold loans (54 per cent). How do you perceive the risk in this portfolio? Is there any internal cap set on gold loan exposure?

Currently, our gold loans constitute about 10 per cent of loans. In the past, the peak levels have been about 15 per cent. We are okay taking the exposure upto 15 per cent. Given the overall growth in loans, we still have enough headroom to grow that portfolio. In any case, we do not expect this rapid growth of 40 per cent (annualised) for long, it should moderate to about 20-25 per cent over the next 12 months.

Has the RBI increasing the LTV for gold loans to 90 per cent, triggered the robust growth?

Not really. Gold loans have grown owing to many other loan segments which have slowed down. For us the LTV on gold loans is about 80-83 per cent, which is re-adjusted every day.

How has the non-resident business been?

The non-resident business continues to do extremely well. Our market share in remittances is up to 17 per cent from 16 per cent earlier. If the momentum sustains we can see our share touching 18 per cent. What is important to note is that the money coming in from the middle-east into the banking system is a more structured money flow. This is not opportunistic money and hence we continue to see good growth.

To curb misuse, the RBI had tightened current account opening norms. But the deadline to implement the norms has been extended to December 15 and banks are awaiting clarity on them. What are the key issues here that banks are facing?

The norms are of course welcome, because the intent is clear. But there are some operational challenges. For instance, government benefit transfer may come to one account, but the loan account may be with another bank. Similarly, banks will act as the central registry in this case to take care of transfer of monies. Some of these practical issues need to be addressed.

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