It is more than a year since Mr Shyam Srinvasan took over as a Managing Director and Chief Executive Officer of Federal Bank. On the sidelines of Bancon 2011, we caught up with the MD to know how he was transforming this old private sector bank and get his views various other industry trends. The bank may require as many has 3,000 personnel over the next 17 months, the MD observed.
Excerpts:
One, we need to become more contemporary and refresh ourselves so that we are able to be relevant to our target segment. Two, we are going to make sure that our strengths are leveraged and we get more value from them. Three, being best prepared for the external environment which is changing dynamically.
As a bank, these are the three areas we are focusing on. I think we are making decent progress. But we know that against our own expectations we have much to do. Financially over the last few quarters, we have been consistently growing. This quarter, we have delivered the best results the bank has ever delivered. That gives us a lot of encouragement. On softer side, we have taken a lot of transformation initiatives; on the people side, process improvement side and leveraging our distribution network. Only 10 days back we have opened 66 branches on one day. It is not about the number which I am excited about. The fact that the bank in almost 40 days came together to deliver 66 branches on one day demonstrates the power of the team. I believe we are making right progress.
Can you elaborate on what are your strengths and how you are planning to leverage on them?
The bank has traditionally been very good in one geography and two segments. The geography is Kerala and two segments are non-resident Indian (NRI) and small and medium enterprises (SMEs) in which Federal Bank is well-entrenched. From a foot print point of view, we are now 825 branches, only 450 of them are in Kerala. We are almost 400 outside Kerala, which is equal to the size of some of the new generation banks put together.
Our focus is on how to take the strength of our segment knowledge outside our home market and grow sensibly in other markets. We are not expanding because it is fashionable to expand. We are expanding because we want the SME and NRI businesses which are the core of the bank in Kerala, to be core of other locations as well. Tamil Nadu is a market where last week, we opened nine branches. We have a plan to open another 30 branches by end of March 2012 in Tamil Nadu taking the count to 100 branches in this zone. Likewise in Gujarat, earlier we had four branches, which may probably go up to 30 by end of March. We are increasing our foot print to serve SME and NRI customers in select geographies.
How has your NRI business performed during the recent currency volatility?
Because NRI savings in their home currencies was more in rupees, we saw substantial inflow into NRI deposits. We have grown materially on NRI deposits because of three reasons. One, due to weakening rupee. Two, we have invested and doubled our field force in our catchment markets. Three, in terms of products, we have introduced a few products which are best in class in terms of remittance. There is a product called ‘Fed Flash' by which a remitter from any of the exchange houses remits the money and as he leaves the exchange house, the money is in the account of remittee. NRI business for us traditionally is from West Asia into Kerala. Now we have increased our footprint in five other states.
With rising interest rates are you witnessing any stress? How is your SME loan portfolio performing?
There may be some clients who may face stress. If you take our book, in terms of geography or vintage of Federal Bank relationship, the large part of the book is in the geographies we are familiar with and businesses which have been with Federal Bank for the last 15-20 years. The stress may be in terms of reduced profit margin. The new relationships which have started in the last two-three years with less robust business models may see some stress. If one sees the growth over the last 2-3 years we haven't grown much into that area by choice as the bank has been focusing on shifting the risk management practices. Now we are doing substantial amount of risk management re-engineering.
We are not carrying any extraordinary risk on our books. Secondly, our provisioning has been very conservative. Our bank has 80 per cent non-performing asset provision for the last four years. Thirdly, our system identification of bad loans has now been for three years. To sum it up, system recognition, vintage of clients, segments of business, markets we know, changing risk management practices and relatively lower growth over the last couple of years gives me the comfort that we are in a reasonable place.
If system-based recognition has been around for last three years, then what has changed in terms of risk-management practices post-new management takeover?
We have actually done 3-4 big things in the last one year. One, we distinguished differently origination and under-writing. In conventional banks, under-writing and origination of loans, approvals, sanctioning and monitoring are all done at the branch level. We have made a big departure from this model a year back. It is a difficult call, even now some parts of our network are finding it uncomfortable, but we said it is a good thing for the bank.
Two, we started supporting them by setting-up credit rating specialised hubs. We have 19 hubs currently. So we have invested in origination, under-writing and credit rating specialists. Third, we have set up a credit monitoring hub look at client profile, how his behaviour is and what we need to do. And the last is an independent collection capability and analytics to support it all. In some areas we have made good progress.
One distinct difference between new private banks and older peers with similar operational parameter is employee unions. How has the experience with unions been in this transformation exercise?
First, let us not demonise them. If you are Kerala headquartered bank, it is a reality. On most occasions we have worked well. There have been occasions when there was some difference of opinion and there is some push back. But I think by dialogue we will be able to solve these issues. I won't say that it will never be a problem, but it is not a problem today. Second, we are not doing at least consciously anything that would agitate the unions. All that we are talking about is transformation and growth, for the bank and the people. If there is growth and people are seeing opportunities I don't see what unions can oppose.
Have you taken any employee restructuring/rationalising measures such as VRS programmes?
We are not brought any like that. The natural course of retirement will take. We have not brought any laterals or hired many seniors from outside. All our growth and opportunities are for people within. We are investing heavily in skill building at all levels. Barring myself, an executive director and head of treasury we haven't brought any seniors from outside. We don't intend to bring too many of them. We are investing in hiring. During the period I have been with the bank, we have hired 1,000 people. All of them are minus 25 in their age. We are like a dumb bell organisation. We have 3,000 people with plus 30 years in experience. We have 4,000 people who are minus 30 years in age. So we are unique extremes of the organisation and we are investing on both sides.
Federal Bank has high capital ratios and low leverage. Is it a deliberate move?
Capital adequacy and ROE being low as in 2009 was when Federal bank had aspirations to buy a bank. There was a rights issue through which we raised money. As the board ,later believed we should not proceed with that possible acquisition, we were sitting on some capital. In fact we have the best CRAR in the country. I don't have to go to the market when the markets are tight. We are back on growth and are seeing better utilisation of capital.
What would be your credit growth drivers going forward? How will the slowdown in economic growth impact you?
About this year's financial growth one should not sit and worry. The pipeline of sanctions will take care of the growth. We are focusing on select some segments where we are seeing still robust demand. Gold loans, for example, is seeing fantastic growth. We are a good gold loan player. If you compare the incremental flow, we are one of the best in the market. In one year, we have moved from Rs 1,000 crore to Rs 2,600 crore.
Home loans is still growing for us. On the large corporate side, now that we have a full fledged large corporate team and given that we are well-capitalised with good balance sheet, I am able to go to big corporates and at least get my foot into the door. We have opportunity to lend where others may be winding up. Growth in credit near-term is not an issue in my view. Long-term has to be more investment-driven in the country. That is subject to lot of factors including addressing regulatory issues and various reforms. But still a seven per cent GDP growth will provide you a credit growth of 15-18 per cent.
Federal Bank's net interest margins (NIM) have come off from more than 4 per cent to 3.7 per cent? Will it go back to 4 point something levels?
Our guidance is that this year NIM will be 3.7 per cent. In coming years it will be trending towards 3.5 per cent. I don't look at NIM. I look at risk adjusted margin. I would rather have a 3.20 per cent NIM with 80 basis points credit costs versus 370-380 bps NIM with high credit costs. The risk-adjusted margins at 3.2 per cent levels will improve the predictability of my portfolio. We are trending there.
What would be the impact of new bank licences on Federal Bank?
By the time the new bank licenses start their operations and gain a meaningful scale, it would be three years away. We are not going to stay quiet. We have aspiration plans to scale-up our business. Three years from now, we'll have 1,500 branches. So we will be sizeable in the market. I will not sit and worry whether new banks are hurting or not, because they have that much to catch-up. However, there will be a huge raid on our bank's employees. Our young team at that time would be four years into the job, trained and invested by us. But that is bound to happen in any competitive environment. Yes that is a challenge, but I will not be alarmed by it today. We don't see attrition today. Prospectively we will see. So we have to learn certain new skills. That is some we have to learn to do.
Are you looking at inorganic growth opportunities to gain scale?
There are not many opportunities currently in the banking space. Right now our focus is on growing organically. But a year from now if something attractive comes up we will surely look at it.