25-30% growth banking business remain our core focus: Romesh Sobti, IndusInd Bank

In a conversation with ET Now, Romesh Sobti, MD & CEO, IndusInd Bank talks about earnings, investing in microfinance business and the company's loan book growth. Edited excerpts.

ET Now: Let's talk about your performance last quarter. Your earnings look very good. So what you managed to achieve in next 35 quarters, will you continue that for another 10 quarters?

Romesh Sobti: We have a pretty steady and validated business model. The operating environment will only improve for the better each year and therefore there is no reason why we should not be able to show the similarly robust figures for the next 10 quarters.

ET Now: Your NIMs have managed to touch 4% for the first time. What has led to the strong performance and do you think you will be able to beat this kind of performance in the next quarter itself?

Romesh Sobti: We have witnessed a very strong growth in the interest income line for almost seven or eight quarters now. We have had expansion in our NIM and, of course, this has now touched the aspirational level of 4%. The drivers behind the 4% NIM, of course, are both on the yield side and the cost of deposit. On the yield side, the mix is changing for the better. The retail part of the business is now growing faster than the corporate part and the other drivers like microfinance, non-vehicle retail book is growing well. On the cost side, we have had very robust growth on savings and current account for last quarter. CASA grew by almost 46% and SA by 37% so that is creating a good mix on the deposit as well. Both are contributing to the NIM and there is nothing to prevent the NIM from moving in the same trajectory.

ET Now: Do you think that the mix will continue to tilt heavily in favour of retail for the next four quarters?

Romesh Sobti: The corporate book is growing healthily but there are some elements of the retail book and high-yielding book which are growing faster. The non-vehicle book that we started building about two, two-and-a-half years ago, is growing in 45-46% range. Given the operating environment and the numbers on the retail lending side will only be boosted by consumption demand from the money flows from OROP and pay commission. Tilt in favour of retail will continue till we balance out a 50-50 between the corporate and retail businesses. There will be beneficial impact of this on the interest margins.

ET Now: So whereas CASA has been a success story for the quarter gone by, but the way how interest rates are coming down, do you think to sustain such low-cost deposit numbers will be a challenges?

Romesh Sobti: Savings is a flow that goes through the whole system because it comes out of almost involuntary behaviour. You have savings bank account because you used operationally your saving bank accounts. You pay a credit cards bill out of there. Your debit card works on your savings account. You pay your utilities bills from there. Your dividends come into saving bank account. So therefore these balances on the saving side are intrinsic to most people’s activities, that will always remain a core. Even though savings may move between fixed deposit rates and national saving schemes, basic saving accounts I think remains a core activity both for customers and banks and that will keep growing.

ET Now: Are you looking at ramping up your presence in the microfinance business?

Romesh Sobti: Microfinance has occupied our mind for a very long time, almost 20 years now. Even in the previous banks, we were all in ABN Amro. We were perhaps the only foreign bank which did micro-financing, so we strongly believe in micro-financing. We started building this book about five years ago and have developed this unique partnership model with MFIs, where their branches work for us. Now, as far as acquisitions are concerned, buying small stakes here and there is not really meaningful. We have very long associations, our people are on the boards of many of these MFIs and these relationships will carry us through. So, we won't go with small stake purchases to established prioritisation in MFI. We have 11 partners already and we are looking to grow them.

ET Now: Analysts want more clarity on what is your view on the CV cycle for the next 12-24 months. If this scheme comes in wherein old vehicles have rehashed that only adds the colour, what is your thought personally?

Romesh Sobti: When you say vehicle finance most people refer it to commercial vehicle finance, but there are so many other components. In our book, for instance, we have seven or eight categories of vehicles from two-wheelers to eight wheelers. We see a boom coming in this segment. In this month, we expect a very high financing for two-wheelers. Two-wheelers will be fuelled by the money flows coming from the government are. Commercial vehicles have already started building up and we have seen a surge in the last four quarters. This quarter, there was a little little de-growth in commercial vehicles segment but that is mostly cyclical and can be attributed to monsoons etc. We do expect the second half to be much more robust than the first. It will be fuelled by the mining sector. 100,000 commercial vehicles were sold at the last peak of the mining segment. Tippers and loaders that will draw a lot of demand. We expect that, beginning third quarter till the first half of the next year, commercial vehicle demand will be pretty robust. Vehicle finance growth is noe becoming more secular. The laggards like LCVs and HCVs have also started building up and their growths have gone into double digits. I think the whole sector is going to see pretty robust growth in the coming three-four quarters.

ET Now: That is the good part, but what about the bad part, what has contributed to the slippages?

Romesh Sobti: Slippages are also part of our life but that has gone down. There has been a a steady improvement in our slippages. We came down from 1.14% to about 1.1%. Our gross and net NPAs, marginal improvement, credit costs were absolutely stable, so our net credit cost came to 14 bps. For H1, our net credit cost has come to 28 bps. So it is on track. We believe that our overall credit cost for the year should be within 60 bps like the last 2-3 years. Ther are slippages, bad debts, one odd account slips from restructured into NPA which happened this quarter but it is all built into the overall credit cost which is very steady.

ET Now: How much of your existing loan book is in trouble sectors - power, steel, which has been an economic challenge? Will some of your loans which you been recognised as NPAs soon become good assets?

Ramesh Sobti: In the first phase, some of these restructured loans and loans which went into SDRs etc. are coming out of the morass. There will be some recovery but you will see most of it happening in the restructured books. As far as the sectors you mentioned, our exposure to those is very low. If you look at our investor presentations we give a break up sectoral percentages, exposures; construction for instance is less than 1%. We have a little in the power sector but not for projects, for working capital for completed projects. Power is only 1.7% of our total. Steel, of course is coming out of the mess, that is 1.8%. Our exposure is pretty well dispersed but overall question on will you see NPAs lowering - yes, but it is going to happen more out of the restructured book.

ET Now: So, is there any threat over in the next 4-6 quarters to this 25% loan book growth or a 30% odd NII growth?

Ramesh Sobti: If anything, loan growth is going to pick up even more. Our loan growth is well dispersed over microfinance, SME, mid markets, large corporates, PSUs on the corporate side, and on the retail side over about eight or nine non-vehicle products and seven or eight vehicle financing products. So it is a very secular growth and all these sectors are now showing buoyancy. We expect, for instance, in a non-vehicle segment, we will keep growing at over 40% because the base is small. In vehicle finance, we expect to grow over 20%, last quarter was 22%. The corporate book is growing in the 25-26% range because we are deepening our existing relationships. The coverage is also increasing. We are pretty confident that loan growth will remain in 25% to 30% range. the fact that cost of deposits and funds is also falling, keeping the NII growth in the high 20s or the early 30s would be an ambition we would like to fulfil.

ET Now: You do not have presence in the insurance sector, AMC business, brokerage, so are you committed to only banking? Two years-three years down the line, would you be looking to enter in new growth areas?

Ramesh Sobti: Banking space itself gives you a very wide room for growth and this market is expanding very rapidly in spite of the competition. So, banking will always remain our core domain focus. We have gone through this whole laundry list one by one and still believe that except for one or two areas where we might open up para-banking like general insurance, we would stick to banking. Creating 25-30% growth in a banking book will remain our prime focus. We are distributors of third party products. We would like to remain that. If you see the distribution income for the last quarter, you would agree that it is the place to stay. But we keep looking at other areas; general insurance is one such area but there are no plans as of now. People have bought proposals on funds, brokerage but we have not seen very strong rationale for pursuing these new openings in para-banking.