Private sector lender YES Bank is witnessing over 1.2 billion monthly incremental payment transactions after becoming one of the four payment service provider (PSP) banks and exclusive merchant acquiring partner for Paytm.  Prashant Kumar, MD & CEO,  tells Piyush Shukla that the bank will spend Rs 1,000 crore in FY25 on building and modernising its digital and technology capabilities. Excerpts:

What has been the rise in payment transaction volumes after partnering with Paytm?

Before onboarding Paytm, we were processing around 3.8 billion transactions per month. We saw an addition of 1.2 billion transactions per month after onboarding them. Overall, we are now processing over 5 billion transactions per month. While there are three others who act as PSP banks to Paytm, YES Bank is the exclusive merchant acquiring bank partner for existing and new merchants. This is an advantage for the bank, as we have some floats available in the current account and receive fee income.

What are your tech and IT expenses planned for FY25?

We have a capex of almost Rs 1,000 crore for building IT and digital capabilities, which is around 10% of total operating expense, and going forward we will continue to maintain it. For all financial institutions, it is always very important to stay on top of the curve of digital operations.

Has there been any communication by SBI about stake sale plans in YES Bank?

I am not the right person to answer this question. It can be answered only by the State Bank of India (SBI).

Will you raise capital during FY25?

Our common-equity tier-I (CET-1) ratio was at 12.2% in the March quarter, so we don’t require any capital, at least for the current financial year.

What could be the impact of RBI’s project finance draft guidelines on business?

We are not big players in project finance. We are still assessing the impact and have been quite slow on the corporate loan side, especially for the long-term projects our exposure is very small. So I think even if final guidelines are similar to draft guidelines, impact on us would be insignificant.

Do you plan to lower the pace of growth in the construction finance segment?

Our project finance book is hardly a few hundred crore. Because of this circular alone, any bank would not slow down growth on project financing. The only thing is that cost has to be passed on to customers because there would be increased cost on banks due to 5% provisions. Interest rates for project finance may rise by not more than 25 basis points (bps) if the final guidelines are the same as draft ones.

How do you see the cost of deposit and CI ratio panning out in FY25?

Cost of deposits has peaked, accordingly we don’t see the possibility of an increase in the cost of funds. Regarding the cost of income ratio (CI ratio), for a long time we have said that our problem is more on the income side, not on cost. On the income side, we are impacted because 11% of our assets are sitting in RIDF (Rural Infrastructure Development Fund), where yields are 2% below repo rate.

If I give you a comparative figure, our net interest margin (NIM) is currently at 2.4% and excluding the RIDF impact, our NIM would have been at 3.1%. Now we have reached a situation where there is no shortfall in priority sector loans (PSL), which means this year onwards we will be getting write back from deposits maturing in RIDF, which happens over a period of time.

Secondly, we are also gradually moving into higher yielding asset classes, which will aid income. Our other income has been growing well, and it will continue to do so. These three channels will help improve our overall income. Therefore, NIM has now bottomed out and will rise from hereon, and the CI ratio too will likely moderate from 74% in FY24 to 60% over a period of 3 years.

Now that PSL norms are met, is the plan to acquire MFI off the table?

No, it is not off the table. I think microfinance business is important on two counts, one it helps meet PSL norms, and it also is a high yielding asset. So I think this business continues to be a matter of interest to us, but only if we get a right fit. A lot depends on the valuation of the proposed transaction. Expertise, management bandwidth and capability of teams are of paramount importance in MFI acquisition.

What is the guidance on RoA for FY25?

We are ending FY24 with 0.5% return on asset (RoA), and are quite confident that by FY26 we will achieve 1% RoA.

Despite improving financials, analysts opine that the bank’s stock is overvalued. Your views?

Ultimately, if you see from a markets point of view, people always would like to see sustained growth performance over a period of time, then you start giving multiples. So for us, the story is very young if I view the bank from their lens. So better performance on a sequential basis will lead to higher multiples.