By Shashank Didmishe
South Indian Bank is aiming to maintain its double digit credit growth during the remainder of the financial year 2022-23 after coming out of a trough, while keeping an eye on the quality assets while driving the growth, Murali Ramakrishnan, managing director and chief executive officer of the Kerala-based bank said in an interaction. The bank posted 11% year-on-year (y-o-y) growth in loans in Q1FY23, catching up with the industry average of around 12-13%, after witnessing a fall in credit for five consecutive quarters in a row.
“We had grown by only 4% in the last quarter. In the year before that, we de-grew in our advances growth. This is the first stable year for me and I am expecting double digit growth. We want to grow across all segments. Clearly retail and SME was the focus areas, so that we can granulate our risks. We are aiming at quality asset growth across all products,” Ramakrishnan said.
The growth in loans in Q1FY23 came mostly from the corporate loan book, which grew by 31% y-o-y and constitutes close to 30% of the advances, while the remaining portfolio, consisting of retail and MSME loans showed a muted loan growth of around 4.6% y-o-y. Credit card, vehicle and gold loans are driving the retail credit business, however, home loans and mortgage loans are lagging. MSME loan growth also saw a decline of close to 10% y-o-y in Q1FY23. The bank is witnessing an improvement in the MSME lending as the sector is recovering from the shock of the pandemic, Ramakrishnan said.
The corporate portfolio of the bank, which is the key driver of loan growth, consists of pharmaceutical, non-banking finance company (NBFC), coal importing entities, infrastructure and automobile sectors. Around 80% of the corporate lending of the bank is to ‘AAA’ and ‘AA’ rated companies. The bank started by corporate lending by taking part in their short term products and has now graduated towards term loans and working capital loans after forging long-term relationships with the companies, Ramakrishnan said.
Although corporate lending is driving most of the loan growth as of now, the bank wants to improve in the other segments as the bank is getting lower returns from the segment. While the management opted to deploy excess liquidity in credit products rather than park it in G-Sec or similar lower-yielding instruments, higher corporate lending will lead to contraction net interest margin (NIM), ICICI Securities said in a report.
“The question is whether we can lend such large amounts for small return-on-assets (ROA). The space for corporate loans for AA and AAA companies is very competitive, we will see if it makes sense for us to remain in such a competitive space,” Ramakrishnan said.
The higher corporate lending resulted in 6 basis points (bps) sequential reduction in NIM to 2.74% from 2.80% in Q4FY22, the brokerage said. On a y-o-y basis, the NIM improved by 19 bps led by lower cost of funds and higher income due to recoveries and upgrades. The bank is hoping to reach to NIM of 3% in FY23.
The bank’s asset quality saw an improvement in Q1FY23 as the bank managed to contain slippages and improve recoveries and collections. Slippages stood at Rs 435 crore coming from MSME and corporate segments while recoveries improved to Rs 300 crore, leading to an improvement in gross non-performing asset (NPA) ratio. The bank is planning to restrict its slippages to Rs 1,600 crore and net NPA ratio to sub-2% levels in FY23 from 2.87% as on June 30, Ramakrishnan said.