‘Dena Bank diversifying loan book by focusing on small ticket loans'

Mumbai-headquartered Dena Bank is focusing on catering to the demand for loans from small and medium enterprises, housing in non-metros, and rural areas (under financial inclusion) to power its growth.

At a time when demand for big ticket loans from the manufacturing sector appears to be somewhat slackening and there is upward pressure on cost of funds and downward pressure on margins, the Chairman and Managing Director, Mr D.L. Rawal, says diversifying the loan book by focusing on small ticket loans is essential to balance the loan book and from the risk management perspective. In a chat with Business Line , Mr Rawal explains how he intends to steer his bank through the challenging times facing the banking sector.

On growth in the third quarter and expectations in the fourth

Growth was good in the third quarter. It came from infrastructure, cement, steel and segments related to infrastructure. We could see some growth on account of peak seasonal demand from rice millers, sugar industry and all those segments depending on agriculture.

However, in the current quarter it looks like the growth momentum has slightly slowed down. One is that we are not getting many fresh proposals. This may be because in the case of power sector many banks are close to reaching their exposure limits. In the case of road projects, there are a few concerns that need to be addressed. But then lot of long-term funding has been done. So, banks will have to see their books and exposure also. It is not as if banks have stopped lending, it is a question of exposure limits only. So, beyond a certain point banks cannot expose themselves to a single segment. I think from the risk management point of view also it is important that there should be no concentration of risk in a particular segment. We try to ensure that at no point of time we have concentration of risk in a particular industry or segment. So that is how we balance our total credit portfolio to avoid risk concentration.

When it comes to the agriculture segment, funding has already been done in the last quarter. Agriculture growth, as usual, will take place because monsoon was good. So, there is no issue on this front.

In the current quarter, we expect that in the case of infrastructure whatever sanctions have been made, disbursements should take place. In most of the cases project loan documentation is going on while in some cases it has already been completed. We are having problem in the manufacturing sector because we are not having much of proposals. Even in infrastructure segment also much inflow is not there now in the current quarter. Maybe, 15 days is too short a period to pronounce a judgment

Real estate and housing

Slightly because of psychological factors, there is a slump in the market and we do not find any growth. At the same time, when it comes to housing, banks are willing to lend. But then they are willing to lend for ‘affordable housing' only. In big cities like Mumbai, Delhi, Kolkata, Bangalore, and Hyderabad affordable housing stock is not available within city limits. It is only in the rural, semi-urban and urban areas that such stock is available and real housing growth is taking place. Last quarter, we had 27 per cent year-on-year growth in home loans because of demand from these areas. Our focus is on the middle-class segment. Middle-class people cannot afford to have a house in big cities because it is very costly and beyond their reach.

Small and medium enterprises

We have gone to the clusters and explained our schemes to entrepreneurs. We are trying to bring them closer to the bank and we are getting a good response. Establishing business relationship takes some time. These are all small SMEs, with requirements ranging from Rs 1 crore to Rs 5 crore. The financing requirements of this segment need to be addressed by banks. They really do not know how the banks function. They do not know about the documents and papers that are required by banks. Even if there is no growth in bigger accounts, we are seeing growth in smaller SME accounts. This is our focus area because yield on advances is good. Even if one or two accounts go bad, the risk is dispersed as there are quite a large number of accounts.

CASA deposits and net interest margin

There has been a good growth in low-cost CASA (current account and savings bank account) deposits. These deposits have grown 26 per cent year-on-year. Savings bank deposit growth was very good at 28 per cent and we hope this trend continues in the current quarter. But, one clear thing is that because interest rates on term deposits are very high, CASA growth probably may not be sustainable now. People will have the tendency to shift funds from savings bank to fixed deposits as interest rates are high. As against 28 per cent growth in savings bank deposits in December, we might see a 26 per cent y-o-y growth by end of year. This has cost implications.

We were having net interest margin (NIM) of around 3.5 per cent. We indicated in the middle of the year itself that we will end the year with a NIM of around 3.20 per cent. We maintain this projection. We had anticipated increase in deposit rates. All along banks were having less than 3 per cent margin. Second quarter was an exceptional quarter because of the shift from BPLR to base rate based lending. So, all short-term loans, which were priced at 4 per cent, 5 per cent and 6 per cent, got re-priced at the base rate.

As a result, NIMs were substantially high for all banks. But now though the cost is going up, you cannot pass all the increase to borrowers. So, some slight impact will be there on NIMs. But there is unnecessary psychological fear that NIM may go down. No, they are not going down.

We were comparing only with one exceptional quarter. If you compare with earlier quarters, it has gone up and now it will be maintained also. If I say 3.20 per cent NIM, I'm quite sure I'll be able to maintain it because base rate and BPLR have been increased. And we don't want to unnecessarily go on increasing rates. Above 3 per cent NIM is good enough if you compare with earlier years when it was always around 2.5 per cent for most of the banks. There should not be unnecessary worry in the market due to NIM. This I would like to dispel.

Rural areas and financial inclusion

Rural areas offer huge growth potential. Firstly, on account of CASA and term deposits. Secondly, money is flowing due to payments arising from the National Rural Employment Guarantee. Thirdly, banks are going for financial inclusion in a big way. Under the Financial Inclusion Plan (FIP), we are trying to ensure that credit marketing is also done simultaneously. Hence, if we offer two-three products in rural areas, FIP becomes viable for the bank also. We are putting in place technology, manpower and allied things. We want to build banking relationships in rural areas. Business Correspondent (BC) is an extension of the bank. All facilities which are available in a branch will now be available virtually next door in rural areas without having to travel, say for 40 km to avail of banking services, and wasting time and money. We see this as a huge business opportunity. We will appoint 800 BCs, out of which 300 would be appointed by March. 800 villages with population over 2000 have been allotted to us. Besides, we will also provide basic banking facilities – savings bank account, savings bank-linked overdraft, Kisan credit card/general Credit Card, and remittance facility – in 1,000 villages with less than 2,000 population. We also intend to provide micro-insurance. In three to four years, banks will be able to bring most of the population under their net.

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