As uncertainty over the policy rate continues to persistswe speak spoke Dhanlaxmi Bank's Chief Financial Officer, Mr Bipin Kabra, spoke to Business Line to know about the impact of regulatory moves on banks, in general, and Dhanlaxmi Bank, in particular. We also asked him as to how thehis bank is coping with rising rates and asset quality pressures, and a host of other issues.

Excerpts from the interview :

Why is there a liquidity deficit despite high inflows by way of deposits?

Banks used to see high inflows into certificates of deposits (CDs) funded by mutual funds (MF). This has come down as the MFs themselves are not getting high inflows. Liquid MFs used to contribute a lot to the banking system.

We will gradually know what the dependence on mutual funds is as we approach the September deadline. (Banks have to reduce their exposure to liquid mutual funds to 10 per cent of their net worth by the September deadline.)

Given that we are approaching the September deadline (after which the demand for CDs may fall), what is Dhanlaxmi Bank's dependence on CDs?

We don't depend much on CDs. That was the only dependence on MFs. However, we were also investing in MFs. To that extent, CDs or MFs withdrawing from the market will not affect Dhanlaxmi Bank much.

Going forward, how do you see interest rates moving?

We expect a maximum of another 50 bps hike in the policy rates. We are in the business of intermediation. Therefore, any rise in the cost of borrowing will have to be passed on to the lending unit. There is normally a gap between the increase in the overall cost of borrowing and lending rates. Different customers behave in different ways.

One set of customers, such as large corporate customers who have access to other avenues of funds will, therefore, resist an increase in interest rates. Retail and SME customers tend to take the higher interest rates (in their stride). During rising interest rates, however, the demand for retail credit goes down. One cannot rule out the possibility of demand for mortgages and cars going down.

What will be the impact of rising interest rates on your asset quality?

Asset quality may come under pressure because people who are over-leveraged and are unable to absorb large costs may show delinquency. Basically, a bank's own strategy as to the sector it has lent to and whether it has enough margins to take care of delinquency, has to be seen.

In retail, the personal loan segment is usually avoided as this segment shows a lot of delinquency. In mortgages, the tenor is increased, therefore, the ability to pay is still controlled. As a rule of thumb, a large rise in the interest rate will increase some amount of delinquency.

What about SME segment loans?

I think they will be affected on two counts. One is obviously due to the rise in interest rates. And, two, the growth engine of the economy is slowing down, which is more of a worry. If the interest rate continues to tighten, the economy will slow down, which will impact this segment adversely.

Your provision coverage ratio (PCR) is lower than the RBI stipulated 70 per cent? How will you bridge the gap?

I don't think our PCR is very low. We are at 60.5 per cent as against 70 per cent prescribed by the RBI. We have all along followed the RBI's guidelines on individual provisioning. The RBI has given us time till September 30 and we are confident that by then we will be able to improve our PCR to 70 per cent.

The absolute amount of non-performing assets (NPAs) is also coming down. Our absolute NPAs came down by 15 per cent last year, which means that the recovery team is quite active. Much of the recovery has happened from old NPAs. The loans we have disbursed during the last two years haven't shown much slippage.

Your net interest margins have improved during the time many banks have witnessed a fall. Is this NIM expansion sustainable?

Our margins have improved because of the change in the business product mix. There is not too much scope in changing the business mix (from corporate to retail and SME). We will try to diversify our exposure than over-depending on one segment.

Having said that, there is definitely pressure on the NIM. However, we will try and maintain NIMs at current levels. More than 70 per cent of the loan book is on floating rate. Among blue-chip corporates, there is some reluctance to absorb higher rates. Therefore, there is pressure on both sides, borrowing and lending. If it continues for long, it may not be good for the economy.

What are the loan growth drivers for Dhanlaxmi Bank ?

For us, the two main segments of loan book growth this year are retail and SMEs. The retail segment had gathered pace very well last year. This year our focus is more on SME lending. We have a large corporate segment with a share of about 64 per cent. We expect the large corporate portfolio to come to about 30 per cent as we focus predominantly on SME and retail.

Can you elaborate on your gold financing portfolio?

We used to give loans against gold through our rural branches in Kerala, where we have good brand recall. We used to also buy out loans from NBFCs, but the RBI has come out with a policy that NBFCs cannot sell gold loans for priority sector lending loans.

We continue to lend directly through our branches, which qualifies for priority sector lending. The market is also increasing. In the old days there used to be a segment called short-term personal loans. Those loans, over a period, got reduced and converted into the gold loans segment.

What could be the impact of new bank licences on smaller banks such as yours?

New bank licences will be beneficial for the banking industry. We will see more innovation and competition, which may change the dynamics of the banking industry. However, while licences may be given in the short-term, implementing them may take a long time.

By the time these licensees become meaningful players, it may take another three years. Branch network implementation, setting up the IT infrastructure and technology takes a lot of time. I am sure Dhanlaxmi Bank will be in a different strata in the next three years.

What are your views on the much debated savings rate deregulation?

For banks like ours, where the CASA ratio is less than the industry average, this would be an opportunity to scale up the CASA base because we can increase rates and not be affected to that extent.

The RBI is still thinking of complete de-regulation, but it may not de-regulate in one shot. It may do it in stages. If you see the last two stages, one step was to move to the daily interest rate regime; the second step was to increase it from 3.5 per cent to 4 per cent. We may see a little more increase. After that, they might de-regulate — that is my personal view.

The RBI is still in discussions with bankers to convince them or build an unanimous view on complete deregulation of savings rate.

Has Dhanlaxmi Bank lost out on NRI deposits?

We have definitely increased the absolute amount of our NRI deposits. It is growing at a very rapid pace. But given that our overall deposits are growing at 80 per cent, the share of NRI deposits is not increasing much. Unlike a few other banks, we do no have branches outside India, which is also a limitation.

Can you elaborate on your second phase of restructuring of Dhanlaxmi Bank?

First stage for us was capacity creation and ensuring that the bank was on a par with new private sector banks in terms of infrastructure, technology architecture, product and services. That was our first objective and I think that stage is over for us.

Today, as we speak, we have all channels for transaction and we are present in 140 towns in 14 States. This gives us relatively a larger area to play with. Now it is for us to ensure that in the second phase we are able to derive benefit of our two-and-a-half years of effort.

So, the second phase is taking out revenues from the capacity we have built. Increase capacity utilisation, improving efficiency, increasing the depth of the product — that is our second stage. We have just started this phase in the current fiscal. Cost-income parameters may come down.

What are the fee income opportunities Dhanlaxmi Bank is looking at?

We are targeting about 30 per cent of the income to come from non-interest sources. We are targeting LCs, BGs. We obtained licence from the RBI to import gold and. have started wholesale and retail gold businesses recently. We also plan to enter the foreign exchange market — prepaid cards. Apart from deepening the existing products, enhancing the bouquet of products is also a strategy to improve fee-based income.

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