By Mahesh Nayak
Federal Bank is evolving into a tech-driven, customer-centric institution. National Head Consumer Banking. In his first media interview since joining the private bank, Diwanji tells Mahesh Nayakthat the bank has a targeted approach to boost its CASA ratio to 36-38% and recalibrate its loan portfolio towards medium-yield segments like SME, LAP, and gold loans. Excerpts:
Why is the banking sector adopting a stance of “cautious optimism”?
The banking sector navigates a delicate balance between positive economic indicators, such as robust GDP growth and digital gains, and underlying uncertainties, including macroeconomic risks, regulatory changes, and cybersecurity threats, necessitating a prudent yet forward-looking approach. Banking demands constant vigilance; it’s never a Cinderella story, but rather a stroll in Jurassic Park— you need to be alert and cautious at all times to remain resilient and thrive amidst evolving challenges.
What is Federal Bank’s strategy to grow its CASA base?
We have transitioned from a traditional retail banking model to a targeted approach, aiming to increase our CASA ratio from 30% to 36-38% over the next 2–3 years. This strategy focuses on expanding the current account business by establishing branches in high-potential areas, increasing affluent customer acquisitions, and strengthening its non-resident (NR) business beyond Kerala and the GCC corridor to drive growth and diversification. We’re prioritising growth in current account balances, with a focus on mid-market current accounts and affluent savings accounts in the medium term. Growing our current account base is key to lowering costs and boosting net interest margins (NIMs).
Could you elaborate on the bank’s product yield strategy?
The product yield strategy focuses on optimising returns with a balanced risk profile. We categorise loans into low, medium, and high-yield segments. Our focus is on growing the medium-yield segment (loan against property, auto loans, SME loans and gold loans), while maintaining measured growth in high-yield segments such as personal loans and credit cards, to protect NIMs and ensure sustainable profitability. We’ve slowed the growth of low-yield books (home loans) to recalibrate our portfolio mix for better yields. Now, we’re strategising to tap into these untapped segments (LAP, used auto/CV loans, micro-LAP) for higher yields and portfolio diversification.
How does Federal Bank differentiate itself from its peers?
Our differentiation lies in consolidating our strong presence in the four southern states while selectively expanding into high-GDP and industrial states across India. We prioritise incremental growth that does not compromise our existing strengths, ensuring sustainable market leadership.
What initiatives are underway to enhance engagement with NRI customers?
Federal Bank leads the Kerala-GCC corridor in NRI banking, built on decades of trust. We’re expanding into new corridors, such as Uttar Pradesh, Bihar, and Odisha, to replicate our success and increase our market share. Our strategy includes enhancing remittance flows, community engagement, and cross-selling tailored products to deepen NRI relationships.
What role does technology play in customer engagement?
Around 70% of our new customers come via digital channels, with 25% through fintech partners like Jupiter. We’re also acquiring customers organically using analytics to target them for lending and investment products.
How is the bank addressing the Gen Z segment?
Gen Z customers are attracted to incentives like cash back, exclusive event access, and digital features, as seen in our Travel Credit Card, that aligns with their preferences and behaviours.
Will branch expansion continue amid digital growth?
Yes, we aim to open 80-100 new branches this year, with a focus on northern and western India, while reinforcing our southern presence. To maximise efficiency, we’re tweaking branch operations through ‘Project Udaan,’ which is targeted at streamlining branch operations by freeing up staff from non-revenue generating activities.
What is the bank’s strategy for SME lending?
SME lending strategy targets firms with revenues up to Rs 200 crore, focusing on key industrial clusters such as Tirupur, Coimbatore, Ludhiana, and Ankleshwar/Vapi. We’ll deepen relationships with existing SME clients to drive business and cross-selling opportunities, with a focus on CASA growth and liability expansion, positioning SMEs as key growth drivers and making this a priority area for the bank in the coming period.
How is the bank addressing gold loans in light of recent RBI regulatory changes?
The RBI’s recent clarification has levelled the playing field for banks in the gold loan segment, benefiting Federal Bank, which already holds the largest gold loan book among private sector banks. We’ll leverage our strengths and reach to aggressively expand our portfolio, improve yields, and remain the preferred choice for customers, setting benchmarks in this segment.
What steps are being taken to enhance customer loyalty and retention?
Customer engagement and experience are critical differentiators for building liability balances and improving cross-sell ratios through enhanced brand presence, expanded product offerings, simplified processes, and unique experiences across channels. Our goal is to increase product penetration and share of wallet across salaried, business, NRI, and government institution segments.
What is the Bank’s stance on affordable housing?
Currently, affordable housing is not a primary focus; however, we are evaluating this segment as a potential extension of our home loan business by leveraging our network in Tier-II and Tier-III cities. Robust risk management measures will be implemented to mitigate lending risks.
How does the Bank approach credit cards and unsecured lending?
Federal Bank follows a uniform risk-based evaluation process for all lending products. We closely monitor our unsecured lending portfolio and have the scope to safely grow personal loans and credit cards within our risk framework. We’ll leverage fintech partnerships and focus on organic growth by offering credit cards and personal loans to our existing customers.
How does the Bank manage digital lending and associated risks?
Federal Bank’s digital lending framework utilises advanced data analytics, AI/ML models, and fintech partnerships to enable real-time risk assessment, swift decision-making, and comprehensive customer insights. With significant investments in digital initiatives (over 8% of operating expenditure), we deliver seamless, secure, and innovative digital lending experiences, prioritising technology to maintain industry leadership.
How is the Bank managing its cost-to-income ratio?
The approach to manage cost-to-income ratio is centred on enhancing productivity and operational efficiency rather than simply cutting costs. By centralising back-office functions, we expect a 25% boost in branch productivity, driving income growth. We recognise that the key to improving the cost-to-income ratio lies not just in controlling expenses, but also in driving higher revenues. We’re investing in growth initiatives, which may result in higher costs in the short term, but we’re confident that these investments will yield substantial returns in the medium to long term.
What is your outlook on credit growth and delinquency trends?
Delinquency rates in India’s lending sector are moderating, with full stabilisation expected to take another quarter. Banks and NBFCs have adopted a cautious stance, learning from past aggressive underwriting practices and post-Covid the ‘low and grow’ lending strategies that led to defaults. Unsecured lending is poised for growth from the second half of this fiscal year, driven by refined risk assessment.
Over the last decade, retail demand has surpassed corporate demand. How do you view this trend moving forward?
The drivers for retail and corporate demand differ. Corporate demand hinges on macro and microeconomic factors such as capacity utilisation and the investment climate. Despite lower interest rates, private sector investment has been sluggish. Retail loans, conversely, have grown substantially fuelled by advanced data analytics and digital fulfilment. The ease of credit has led to increased borrowing, including discretionary consumption, such as financing luxury holidays with extended repayment terms. While regulatory and lender guardrails prevent indiscriminate lending, banks must leverage technology and data analytics to adapt to evolving consumer behaviour.