Seeing stress in MSME sector... had slippages of Rs 3K cr: A Manimekhalai

MSMEs showing signs of stress, says A Manimekhalai, managing director and chief executive, Union Bank of India

The uptick in capital expenditure will help grow the corporate book and interest margin, and this will also ease stress in the micro, small and medium enterprises (MSME) sector, says A Manimekhalai, managing director and chief executive officer, Union Bank of India, in an interview with Abhijit Lele. Edited excerpts:

The bank has given healthy performance and guidance of 3 per cent net interest margin for FY24, an improvement over 2.75 per cent in the last quarter of FY23. With the cost of funds rising, how is it going to be feasible?

Now the interest rate on deposits is coming down. In March 2023 itself, the interest rate on certificates of deposit (CDs) declined by 30-40 basis points. Moreover, after the Reserve Bank of India’s (RBI’s) pause on repo rate, they have come down a little.

Also, Union Bank’s 50 per cent loan portfolio is based on the marginal cost of funds-based lending rate. This will be repriced during the current year. By September 2023, the interest rate for over Rs 40,000 crore of loans will be reset. 

While the repo rate has increased by 250 basis points, the bank has passed on customers only 140 basis points in MCLR loans. So we will be able to maintain the NIM (about 3 per cent), looking at current growth, and advances and deposits.

While the loan book grew by about 13 per cent in FY23, what is the guidance for FY24 against the backdrop of signs of moderation?

We are looking at 10-12 per cent growth in loans. The bank already has a pipeline of Rs 35,000 crore of credit. This will be drawn in the next 12-18 months. So, there is no concern about growth in credit and margins.

Coming to the granular part of credit, we are in the midst of a capex cycle, which got momentum in 2021. Will that translate into an uptick in corporate credit?

There has been strong growth in credit for road projects under the HAM (hybrid annuity model) model, besides steel, infrastructure, and textile projects. The government has announced investments in infrastructure and schemes like production-linked incentive schemes. All this will contribute to capex and demand for working capital.

My only concern is on the manufacturing side. But the services segment is doing well. If we see traction at the MSME level in manufacturing, we can have good overall growth in the economy.

Now, moving to the liabilities side, most banks witnessed pressure on the low-cost money aka CASA deposits in FY23. Will that continue?

We have also seen a decline of 93 basis points in the CASA ratio. But, deposits rose by Rs 20,000 crore in absolute terms in FY23. We have taken a lot of initiatives, including thrust on wealth management, for mobilisation of deposits.

The share of CASA in total deposits is about 35 per cent and we want to take that to 37 per cent in the current financial year.

In the last 12 months, we have seen a substantial rise in inflation; the policy rate moved up, too. Its effects will be seen on MSMEs and some parts of retail. Are you witnessing some stress there?

We are seeing stress in the MSME sector. We had slippages of Rs 3,000 crore in the MSME segment. These are covered by credit guarantee and these units will bounce back. 

As we see demand picking up and large corporations picking up advances, funds will flow to the MSME sector, as well. We hope current growth in advances and strong capex coming into the market will provide benefits to them (MSMEs).

The bank has guided for recoveries of Rs 16,000 crore and recoveries of Rs 12,000 crore in FY24. On the face of it, are estimates for slippages and recoveries high?

The slippages were Rs 12,500 crore in FY23. Of this, we recovered about Rs 4,000 crore. So the net slippage was around Rs 8,500 crore.

We will be able to meet the guidance for FY24. We did one-time settlements (OTSes) in 0.21 million cases where exposure was below Rs 5 crore and recovered Rs 530 crore. The bank also pursued SARFESAI cases for 8,425 accounts and recovered about Rs 3,500 crore.

With the initiatives taken, the bank will be able to show better performance (recoveries) in FY24 also and bring down net non-performing assets below 1 per cent.

Staying on recoveries, has the bank finished most of the work on the OTS and SARFAESI front?

The bank has got about 0.7 million accounts under OTS and have completed work in one-fourth of accounts. The work on remaining will be done in the current financial year.

As for SARFAESI, the bank gave notices in 9,500 cases and was able to recover from 8,200 of them. It is either an upgrade or cash recovery. The bank has digitised the whole process. The moment an account becomes NPA, a notice will be issued to the borrower and progress will happen accordingly.