Kathpalia further said that he sees stress emerging in microfinance and that is reflected in the results. They thought it was best to make emergency provisions and get rid of them. They may not need it or use it, but having contingency provisions for bad times is a good way to run a bank with a cyclical portfolio like IndusInd.
Shareholders say it has not been a happy Diwali for them. IndusInd Bank’s numbers have disappointed on all fronts.
Sumant Kathpalia: You need to look at the numbers in detail. Of course, there is a decline in our NIM. We are at 4.08 against 4.25. There was a decline of 17 basis points. This is a significant decrease, but please know that we have reduced the unsecured business which is actually growing negative 6% per quarter and we are giving the secured business which is growing 4% per quarter. As a result, in the microfinance business which is about 10% of our book, which yields 12% higher, we lose about 12 to 13 basis points of NIM.
The second point is, we always say the granularity of responsibility is critical for us. We continue to focus on granularization of liability and we do not stop the growth of liability and granularization and as a result, we grew in a very difficult quarter, 4% quarter on quarter and 16% year on year in retail deposits. We could have slowed down growth and save some and LDR could stay at 87-88. We’re down to 86% and that’s the cautious attitude we’re taking.
I think balance sheet stability and prudence are more important at this time than just growth. We want to show growth, but we want to be cautiously optimistic about showing growth. There is nothing wrong with our balance sheet and our growth.
I’m sorry, but if I compare your comments last quarter with today, no one sees such caution. In 90 days, what have we used, what has changed so that you can create a wise inventory?
Sumant Kathpalia: Well, provisioning is a separate issue. I always think that the fortress of the balance sheet is very important. I saw the stress that appeared in microfinance and reflected in our results and I thought it was very wise now to make contingency provisions and keep it aside. We may not need it, we may not use it, but it is wise to have contingency provisions and keep aside for bad times is a very good way to run a bank that has a cyclical portfolio like ours.
Taking 2.2% of the loan book as a provision is a very conservative view to take on the balance sheet.It’s no wonder that analysts who track your banks have lowered their estimates. He added that he is concerned about growth and he is of the opinion that the stress in the microfinance business will not be a quarterly phenomenon. You know this more than anyone if the cycle reverses, it won’t be a quarterly phenomenon. Is there any reason to worry about the microfinance business going through at least a three-fourth cycle downturn?
Sumant Kathpalia: If you look at the microfinance business during demonetization or during the floods in Bihar or other points, I think the recovery of microfinance is the fastest. During COVID as well, this is the fastest recovery. We have to be careful with two things. Things to watch out for in microfinance, is funding happening and the credit cycle improving? I told you in October the credit cycle has improved. Loan disbursement process, we did 100 crores a day and now at 180 crores a day. So, what we did in the entire third quarter was around 7,000 crores. We’ve seen a 60% to 70% increase in the amount we’ve had in the liquidation that we’ve seen in the first 15 days, so that’s really important.
Number two, 80-85% of our centers are viable and operating at nearly 100% efficiency. This is a very important parameter in microfinance.
Third, I always believe that in good times you make provisions and in bad times you take provisions to manage your credit flow. In our opinion, even if the provision is higher, we have enough buffer in the balance sheet to take care of it. So, the payment will be returned. We have sufficient provisions in our balance sheet to cover the shortfall. We are also strong enough to take care of growth as we move forward.
Your loan book for the past quarter was below 15%. That’s lower than what you reported in the previous quarter and well below the guidance that you’ve had with us. Are you still comfortable calling the guidance number for microfinance growth that will impact aggregate loan book growth over the course of a year?
Sumant Kathpalia: We are definitely growing in the right phase and we have grown 13% this quarter or year on year. It is very difficult to give guidance on microfinance these days. We are seeing growth return. We are cautious about the growth, but I think the growth will continue to come back because it is the festival season and I think the second half of microfinance is definitely better. I also saw the growth of vehicle finance back.
Vehicle finance is going through a very difficult time as the growth of the auto industry is slow. We see some growth, green shoots back in the second quarter in passenger vehicles as well as in commercial vehicles. So, growth should return in the business. We have never had a problem on the book company side and on the bookstore side. So, leaving only microfinance, which is still under review and see what growth it has to do, but I can tell you about the growth, the payment is 70% higher than every day in the last quarter.
This is the only thing I can say right now, but yes, our growth should be told in PC-6. In PC-6, we will meet our ambition from 18% to 22%. I think there may be some places where growth has moderated, but I think it’s only fair because the microfinance industry is under stress and we want to be careful.
On the ROA side, if you normalize our current ROA, we’re at 1.29 if you just take the contingent provisions and I think if you just add the return growth in the microfinance segment and in the CFDs that we’ve seen, you should see us increase our ROA this quarter from now on.
Whether it is wise or in anticipation, provisioning is provisioning, which has dented your number. Here’s how the market sees it.
Sumant Kathpalia: Well, the market can see it that way. In my view, more importantly as a prudent banker, I have to make sure that I have strengthened my balance sheet and what I have done. I don’t want to not do provisioning and later say, oh, I don’t have provisioning. I saw some risk and I took a decision. I can’t use it.
What would you tell your shareholders if suddenly IndusInd Bank shares fell by 15%? They were nervous. Will you assure us that the business is on track and will return this quarter?
Sumant Kathpalia: The message I want to convey is, IndusInd Bank has a strong foundation. I have said it time and again. I also want to inform the investors and the shareholders that the bank is well strengthened and very stable. Let’s not forget the transition phase that has taken place to strengthen the balance sheet. Sooner or later, you will see your bank perform at the level, soon you will see the bank perform at the level expected to do and we are also on the way to do that.
The market reaction is that five of the last six quarters, you have come out with good numbers. The market thinks that the turn is real. You are growing at a higher rate than the industry average. All this is good for you. And then came this quarter. On a standalone basis, the numbers are bad. The market wants to know what has been reported for the past quarter, not the trend.
Sumant Kathpalia: I don’t think so. But you cannot anticipate growth at this stage. If the microfinance industry is under more stress than we are seeing now and growth is not coming back, then I will have to find other ways to grow my business. But microfinance, which is 9% to 10% of our book, returns 23% and is a significant contributor to profit and NIM at this time.
So while I agree with you, I think there’s a difference in what we’re saying and I think we’re doing it with prudence right now, but in my opinion, this is the cheapest quarter, in my opinion, in terms of microfinance. About 60% of business happens in the second half. And even if it doesn’t reach normal levels, you won’t see a downward trend, you’ll see an upward trend in that business and overall, in our business as a result.
Let us work under the assumption that the business is not there and you consciously do not grow or the business does not return as expected. Then, what happens to the overall loan book and overall NIM picture for FY25?
Sumant Kathpalia: It is very difficult to change. We have other businesses that yield 20-23%. For example, we have diversified our microfinance business into a merchant-acquiring business. We can expand the business and get another Rs 2,000 crore growth to overcome the shortfall if we are in the microfinance business. So we have a lot of levers in our hands. We have slowed growth in credit cards and PL. We can scale the business to make sure that the unsafe business stays within range, within the parameters that we have set for ourselves. So we have enough leverage to do it.
To do NIM now and say it will go back to 4.25% would be very difficult for me now. I don’t want to give you guidance on this. But I can assure you that this is a temporary phase and not a permanent problem with the bank. So, maybe a quarter or so, but we have to get back to business.
What does that mean for your capital requirements? How are you positioned in terms of your total statutory requirements as your provisioning is already higher and you need capital to maintain your historical growth rate above 15%. If you plan to grow at 15-16% and provide additional liabilities, the NPA will be higher, which means you will need capital sooner rather than later.
Sumant Kathpalia: So we are at CET 15.6%. I think we will evaluate the requirements when we touch 14%. We will evaluate the capital requirements in March, I don’t think we need it now, and the quarter does not change the capital assessment, and in my opinion, maybe in the third quarter results and the fourth quarter you may have different comments for us.
Well, it may have been a bad quarter, but a bad quarter doesn’t mean this is the new normal for IndusInd Bank. Temporary form, permanent class and I like to believe that for IndusInd Bank, this is a bad patch. All good players go through bad form, but class always comes back. Mr. Kathpalia has directed the shipment of the COVID ship very well. So, focus on the good. Yes, the market is disappointed. I think some financial adjustment is happening.
Sumant Kathpalia: Just one last message. It can be repeated, the bank is very good. I think this is a temporary step taken to strengthen the balance sheet. The bank remains very strong and is ready for what has been set and we will deliver the PC-6 ambitions that we have set for ourselves.
