In 2011-12, Federal Bank’s net profit grew at its fastest pace in three years, despite an uncertain macroeconomic environment that led to fading credit demand and increased the risks of asset quality deterioration. Shyam Srinivasan, managing director and chief executive of the Kerala-based bank, shares with Somasroy Chakraborty the bank’s strategy to maintain its growth momentum in the current economic environment. Edited excerpts:
Your bank’s net interest margin is higher than most of your peers. In 2012-13, will you be able to maintain the margin at the current level?
At the beginning of 2011-12, we had guided that our net interest margin will be in the range of 3.70-3.75 per cent. We closed the year with a net interest margin of 3.79 per cent. This year, we expect a slight moderation in our margin, as funding costs have not come down yet. We expect our margin to be in the range of 3.60-3.65 per cent. We have reduced our base rate by 30 basis points and also cut the interest rate on one-year deposits. But liquidity continues to remain tight. I think the cost of funds will start falling only towards the end of the quarter, once the liquidity situation improves.
Do you expect RBI to cut the repo rate again in June?
The situation is quite dynamic now. A rate cut will depend on how the inflation situation plays out. I don’t think it will be possible for RBI to cut rates immediately. While the central bank will maintain its stance of a lower-rate regime, I believe they will wait for more cues and monitor the inflation levels. For this calendar year, I expect two more rate cuts from RBI. But it may not happen in June.
Has there been any improvement in credit demand after the lending rate cut? What is your loan growth target for this year?
Loan demand continues to remain a challenge for most banks, as very few new projects are coming up. We are seeing a pick-up in demand for working capital finances, and from the mid-market and SME segments. We have seen extraordinary growth in our goal loan portfolio, close to 150 per cent, and it is poised for another year of growth. In retail, we have seen demand for housing loans, especially in tier-II and III markets. We are expecting 20-22 per cent growth in our credit portfolio this financial year.
Your deposit growth has been slow this year. What is your strategy to improve it?
Our deposits have actually grown well in the low-cost and non-resident segment. The overall growth appears muted since we have shed close to Rs 2,000 crore of bulk deposits. We are focusing on improving our Casa ratio; it has moved up to 28 per cent. We also see a big opportunity in non-resident deposits. I will not like to put a number to our growth target for this year, but it will match our credit growth.
RBI has released the final guidelines on Basel-III capital. Will you need to raise additional capital to meet the new norms?
Our capital adequacy ratio at the end of March was 16.6 per cent. Of this around 15 per cent is tier-1 capital. So, there is no immediate need for us to raise funds. We will probably visit the market in mid-2013 or early-2014.