Rising NPA levels and the lowering of lending rates have kept Indian Overseas Bank?s (IOB) margins under pressure. At 2.3% net interest margins, IOB?s margins are among the lowest in the industry. It also posted a 24% y-o-y fall in net profits to R158 crore in the July-September quarter. In an interview with Pranav Nambiar, IOB CMD M Narendra, discusses the bank?s plans to boost profitability by improving recoveries and shoring up low-cost deposits.
How is corporate demand for credit looking?
Fresh projects are not happening on a sustained basis. There is lending happening towards previously sanctioned projects, but lending towards greenfield projects are few. However, in the road sector where NHAI has been allocating projects, we are disbursing loans.
We are also seeing demand from some sectors that are relatively protected from the slowdown, including hospitals and education.
Despite the moderation of rates, we are not seeing credit demand pick up significantly. To what extent have rates moderated?
If you see the interest rates for project financing, it used to average around 14% a few months back, but now this has come down to 12.5% or thereabouts. There are structural and regulatory issues that are holding back corporate lending, more than interest rates. As the cost of funds, however, remains high, we are operating on lower margins.
So, what kind of margins are you operating at?
At the end of the September quarter, our net interest margins (NIMs) stood at 2.3%. This is also the result of recent rate cuts in our retail portfolio as well as the growing NPA levels. We are hoping that a repo rate cut by the RBI in January will push our costs down and help margins. Our NIMs should improve to 2.85% levels by the end of the financial year.
What about retail credit?
We expect overall credit growth, including corporate credit, at around 18% this financial year. The retail sector has become very competitive particularly because corporate loan demand remains sloppy.
We are setting up rapid retail processing centres where there is focused attention on retail and response time is reduced. We are also offering lower interest rates as an investment for the longer term. This will enable us to cross-sell products and also acquire the business of the entire family and the successive generations. There is a lot of room for growing that business given that the penetration of retail credit is still very small.
How do you plan to boost your margins?
We are looking to shed our bulk deposits and grow our low-cost deposits base. We will add 300 more branches this financial year which we expect will push up our Casa base from the current 25% to 27% by the end of the financial year.
My profitability has also been affected by the large amount of provisions that were to be done as a result of rising NPA levels. Our endeavour is to keep new NPA levels lower and improve recoveries.
How does your asset quality look?
The gross NPA levels went up last quarter to stand at 3.9% (from 3% in Q1). In the first two quarters, we have seen higher defaults, but we expect this to moderate for the rest of the year. As far as recoveries are concerned, we have doubled our recoveries as compared to the previous year. Our target is to recover and upgrade accounts worth R1,400-2,000 crore in this financial year.
The restructured book stands at close to 10% of our advances. But our restructured portfolio default is low with the slippages standing at around 6-8%. A large portion of our restructuring has already been completed and we do not have a large pipeline.
