Federal Bank is aiming to increase the share of current account and savings account (CASA) to protect its net interest margins, which could come under pressure as the Reserve Bank of India is likely to begin its rate cut cycle, said Harsh Dugar, executive director of the lender.
The private lender will also focus on increasing the share of high-yield businesses such as commercial vehicle and MSME lending to maintain its NIMs at current levels.
“A cut repo rate will impact NIM because the benefit of lower cost comes with a lag as assets gets repriced quicker (than assets). We are looking to grow the share of high yield businesses such as commercial vehicles and MSME lending,” said Dugar.
“In the medium term, we are hopeful of protecting our NIMs.”
Like other private lenders, Federal Bank has also witnessed compression in its profit margins. Its NIM has contracted marginally to 3.11% in the third quarter from 3.12% in the second quarter of current financial year and 3.19% in the same quarter of previous financial year. Most of the private banks have witnessed contraction in their NIMs during the third quarter of the current financial year, driven by increased stress in unsecured loans.
The bank is aiming to mobilise CASA deposits which will help it to contain cost of funds. “On the deposit side, we are looking to lower our cost of funds by altering our mix by focusing more on CA (current accounts) and SA (savings accounts). CA, which is a little bit lower for our bank, we would like to progressively inch it up,” said Dugar.
“Our cost of deposits has increased but that is reflecting the structural liquidity challenges in the banking system. We believe that we can contain it to some extent,” he said.
The bank has also witnessed higher stress in unsecured loans, which includes credit cards, personal loans and microfinance loans, during the third quarter. However, the share unsecured loans in total loan book is not significant and is currently about 5%. The bank will be cautiously growing its MFI loan book, he said.
Private banks have seen increase in stress in the unsecured loans in the third quarter due to increase in slippages. The rise in slippages, which refers to standard loans turning into bad loans, was primarily observed in their retail unsecured portfolios, particularly in credit cards, personal loans, and microfinance loans.