The ECL model will not dent profits much: Karur Vysya Bank MD & CEO

We will test the waters, ferret out information through our business correspondents, and only then open a branch: B RAMESH BABU, Karur Vysya Bank MD & CEO

The 107-year-old Karur Vysya Bank has reduced its share of the corporate segment in advances over the past two years. B RAMESH BABU, managing director and chief executive officer of the generations-old private bank, in an exclusive phone call with Shine Jacob, says the bank is targeting a growth rate of 14 per cent in the current financial year (2023-24, or FY24) and that the expected credit loss (ECL) model for provision will not affect its profitability to a large extent. Edited excerpts:

The share of corporations in your advances has nearly halved from 40 per cent to 22 per cent in two years. What is your strategy?
 

We have restricted the upper limit of our corporate accounts to Rs. 125 crore. Any account above this limit may well be good or government-owned, but we have politely asked them to shift them to another bank. Our risk appetite is limited to just Rs. 125 crore. Some customers were unhappy, but we employed it as a risk management tool.

Whatever exposure we had, we started taking a granular approach. We started focusing on accounts below Rs. 75 crore. We have thus given them room to grow in the years to come.

Once our balance sheet swells, we can give them additional space. Bad accounts or non-performing accounts were there, but we made a lot of recoveries.

When other segments go up, the percentage of the corporation goes down. There is nothing unusual as far as this decline in the corporate segment is concerned.

Does this mean you are focusing more on the commercial segment?
 

Following the strategy for corporates, the rest of the verticals started growing very well, including commercial, agriculture, and jewellery.

If you focus largely on the commercial segment, its yield is relatively higher by 1–1.5 per cent than the corporate segment. A majority are also backed by collateral. Due to the granular nature of the commercial segment, even if something were to happen to these accounts, our ability to absorb the impact will be much better.

Even if other segments are growing, we will be able to maintain the commercial segment at 32–33 per cent.

In agriculture, over 95 per cent used to be gold loans. We made a concerted effort to go for risk mitigation products in partnership with financial technology companies, dairy firms, etc. These have helped bring down gold loans to 90 per cent of our agricultural portfolio. About 10 per cent are non-gold loans.

The Reserve Bank of India (RBI) has released a discussion paper on the ECL model for provision. What does this mean for your bank?
 

The RBI sought suggestions from all banks. The final guidelines are yet to be released. We did a back-of-the-envelope calculation while working on it. Currently, all the provisioning we have done will be to meet the existing obligation under ECL. We will not see much of a dent in profitability. Our provision coverage ratio is now 92 per cent.

Our current capital adequacy is also 18.5 per cent, against the RBI mandate of 11.5 per cent. Even if we have to make some provision in dribs and drabs, and the capital adequacy drops by another 1 per cent, it will not obstruct business growth.

What is your guidance for FY24 in terms of growth?

We will try to grow 14 per cent during the current financial year (both in terms of credit and deposits), with the retail, agriculture, and micro, small and medium enterprises, or the abbreviated RAM segment, being the front runner.

Our return on assets for the exit quarter has come down to 1.5 per cent. This year, we are targeting the whole year at over 1.5 per cent.

Karur Vysya has crossed 800 branches as of Monday. What is your expansion tactic? You are still focused on South India, with 430 branches in Tamil Nadu itself.
 

We have chalked up a three-pronged strategy. As far as Andhra Pradesh and Telangana are concerned, many districts don’t have branches. That alone lends us enough opportunity. That doesn’t mean we are confined to the South only. We will look at West India. When the opportunity to grow in the West presents itself, we will grow.

If you immediately open 100 branches, it will have a bearing on profit. As part of our expansion strategy, we will have 500 business correspondents at different locations. They will act as our touchpoints, open accounts, and conduct day-to-day transactions.

Once we get enough traction via these business correspondents, we will get a feel for a potential branch location. It makes sense to take this route rather than open a branch outright.

We will test the waters, ferret out information through our business correspondents, and only then open a branch. Additionally, we are opening 35 branches this year.

We will have another channel through which business correspondents will have offices and be connected to our system. A majority of these touchpoints will be in the South and the West, where the brand has a top-of-the-mind recall.