Asset quality not the criterion for transition: RBL Bank's Subramaniakumar

We need to continue with the strength the bank has leveraged in the past decade, Subramaniakumar said

The stock of RBL Bank tanked 22.45 per cent to close at Rs 87.9 on Monday after the bank announced over the weekend that the Reserve Bank of India (RBI) has approved the appointment of R SUBRAMANIAKUMAR as its new managing director (MD) and chief executive officer (CEO) for three years. He and RAJEEV AHUJA, its interim MD and CEO, assure investors of continuity and addressed asset quality concerns in conversation with Manojit Saha. Edited excerpts:

What are your immediate priorities?

Subramaniakumar: The first thing is to meet the RBL team. I am part of the team. The bank has tremendous strength. We have to see how this strength can be leveraged. The bank has already made a strategy paper, identifying areas that need to be fortified. It is a fairly technology (tech)-adopted bank. We will see how this tech can be leveraged further with the expressed intent of increasing the wallet share of customers.  

Next on the agenda is to devise a plan of action for RBL Bank 2.0. The bank had a phenomenal growth story in the past decade.

Which areas will you focus on in RBL Bank 2.0?

Kumar: We need to continue with the strength the bank has leveraged in the past decade. Also, there is sufficient capital available for growth. Leverage that availability of capital and then diversify the portfolio. At the end of the 2.O, say after three to five years, we will be in a position to be a tech-driven bank.

On a day when the stock has tanked over 20 per cent, what is your message to investors?

Kumar: The broader market has also gone down. Discounting that, first I would like to tell investors that their perception with regard to the bank will see a change – it is a transition from one level to the next.

Rajeev Ahuja: We have executed many aspects of 1.0 successfully. The foundation of 1.0 has been enhanced to 2.0. The idea is to develop other retail businesses, like expanding the rural footprint and vehicle finance. And retain the edge we have created over the past several years – in our niche businesses of card and microfinance and the tech side.

For a bank, it is crucial to create customers across the length and breadth of its franchise, by way of opening up more branches, partnerships, etc. And to create a stronger bouquet of products that can help the customer deal with the bank on an enhanced basis. That is where we are headed.

Kumar’s involvement will be very beneficial because he comes with the knowledge of running complex and large franchises, especially ones with retail, micro, small and medium enterprises, agriculture, and rural footprint. His experience of working in those areas will be extremely valuable for the bank.

The market sees the new MD and CEO’s appointment as a precursor to a balance-sheet clean-up.

Kumar: If you look at the March balance sheet, net non-performing asset is 1.3 per cent, with provision coverage ratio of 70 per cent. Asset quality was not the criterion for the transition or change (in leadership). The market perception of asset quality is inaccurate.

The next data point is capital adequacy ratio, which can be used for growth, while not compromising on profitability.

Ahuja: We had no divergence for the past several years. Our net restructured book at 2.6 per cent is one of the lowest in the industry. Moreover, that is substantially secured now. The unsecured bit has been provided.

We entered 2022-23 with a strong balance sheet from a credit quality perspective. Our credit cost will be 2-25 per cent for the current financial year - this is less than half of what we had last year.

Someone asked in jest: ‘Will you do kitchen sinking in the March quarter?’ We will not, given we have been so transparent and open. All we did was enhance the provision on the restructured book, so that we can enter this year on a firm footing for our salesforce to do business.

I believe we will improve on profitability. We will probably see the best profit in our history this year.

There are some challenges on the liabilities side. In a rising rate cycle, how will you address those issues?

Ahuja: Deposits have come back. If you see our closing deposits as of end-March, they were at an all-time high. We had some minor problems in the December quarter, but we have recovered rather well. We do not have any problem with deposits. We are sitting on large liquidity. Our deposit growth is impressive. Yes, the cost of deposits will rise for everybody and most of it will be passed on to borrowers.

How much of your loans are linked to floating rate loans?

Ahuja: At least 55-60 per cent of loans are linked to repo and the marginal cost of funds-based lending rate. In the short term, margins will definitely improve. We will get to pre-pandemic levels in the next six to nine months. Our net interest margins should be in the 4.5 per cent range.

A major part of the profit comes from credit cards and the microfinance business. Will you sustain this strategy?

Kumar: We will be focusing on growth with continuity. When we try to grow, we will ensure continuity. Growth will be based on the foundation built on RBL 1.0. Continuity will be on two fronts. One, continuity of business and improving business with new products. Two, working with the same team. Rajeev has also given a statement that he is going to stay put; maybe he will have a broader area to look at.

Will the relationship with Bajaj Fin continue?

Ahuja: Most definitely. We have had a very close and deeply entrenched relationship for six years. We are doing more and more business with them.