Karur Vysya Bank (KVB) is “exit marking” loan accounts showing signs of incipient stress so that it can cut its exposure to them. Further, the Bank is leveraging its loan origination software to filter loan applications and improve turnaround time.
B. Ramesh Babu, Managing Director & CEO, observed that exiting exposure to vulnerable accounts, especially in the corporate segment, helps rebalance the advances portfolio, tilting it in favour of RAM (retail, agriculture and MSME) advances.
In an interaction with businessline, Babu, who has been helming the century old private sector bank since July 29, 2020, expects total business (deposits plus advances) to grow by 16-18 per cent in the next two years. The Bank’s total business grew to ₹1,76,138 crore as at September-end 2024 from ₹1,08,682 crore as at June-end 2020.
Edited excerpts:
What is the thought process behind “exit marking” loan accounts?
We have strengthened our early warning mechanism by introducing the concept of “exit marking” of accounts. Whenever vulnerabilities/ weaknesses are seen in accounts, we engage with the borrowers. If there is scope to revive, we will support them. But if there is no scope or a borrower has diverted funds, we give an opportunity to him to exit. Otherwise, we will classify the account as a non-performing asset (NPA) and no lender will support the borrower.
Exit marking of an account has to happen before the account gets into the special mention account/SMA (which is an account showing signs of incipient stress) category.
We are engaging with low-yielding and weaker corporates and exiting our exposure to them. In the last one-and-a-half years, we have rebalanced our portfolio, with the RAM: Corporate loan mix standing at about 84:16 as at September-end 2024 against about 78:22 as at March-end 2023.
Why are you focussing on rebalancing your loan portfolio?
We do not want to have credit concentration in any particular vertical. We have four verticals – commercial, retail, agriculture and corporate. So, if one engine (vertical) sputters, the other verticals are hopefully fired up to compensate for the muted business growth in the former.
The corporate loan book used to be about 25 per cent of our overall loan portfolio as at June-end 2020. This has come down to 16 per cent end of September-end 2024. We have brought down the corporate loan portfolio for two reasons – yield on these accounts is the lowest and chances of failure in bigger accounts is higher.
When deposit mobilisation is a constraint for the banking system as a whole, we thought that even if we stop support to the corporate segment, we can always go back to the market and attract them. This is relatively easier as lending to this segment is price driven. But if we stop the retail engine, which we re-started with much difficulty and is running smoothly now, our customers will go to competitors. Getting them back will be difficult.
How have you managed to maintain the net interest margin at around 4 per cent?
Because of increased focus on the retail segment, our NIM is 4 per cent plus. It is during good times that we need to think of the likely risks (such as NPAs) that may arise. Even today, our unsecured retail loan portfolio is only about 2 per cent. There are many banks with 15-25 per cent unsecured retail lending portfolio, but they run a huge downside risk if the situation changes.
I am not saying NIM will continue at 4 per cent. Even if it comes down to 3.8 per cent, our portfolio is safe. For Bank depositors, return of capital is more important than return on capital. If a bank gets into trouble and faces a run, it is unfair to the depositors.
What are your growth projections for FY25 and beyond?
We want to grow our advances by 14-15 per cent in FY25. We are moving in a calibrated way to mop up deposits, which will grow in lockstep with advances growth, so that there is a healthy mix of current account (CA), savings account (SA) and term deposits (TDs). This will protect our margins.
We estimate how much growth we want in assets. Depending on that we mobilise liabilities. We strengthened our liabilities mobilisation apparatus by creating feet-on-street. A year back, we onboarded about 1500 people from various Banks and their duty is to only mobilise liabilities. The average age of our employees is 36 years now.
We want to focus more on the RAM vertical in the next few years. So, RAM loans should comprise about 80-83 per cent of the overall loan portfolio and the rest will be mid-corporate. There are bigger banks which lend to large corporates. If we play to our strengths, we will get value for the capital we are deploying. So, we are not chasing big accounts. We want to rebalance our portfolio along these lines.
We do not want to chase numbers, by focussing on 25 per cent growth in advances and all that. The point is if we do not consolidate, but press the accelerator too far, it is bound to lead to accidents as people, in a bid to meet the targets, will try to take short-cuts. Consequently, the quality of the portfolio will suffer.
In the next two-three years, we will be able to grow our advances by 16-18 per cent. Deposits will also grow in tandem.
As at September-end your GNPA and NNPA was at 1.10 per cent and 0.28 per cent, respectively. What is your outlook for the asset quality?
We want to retain the NPA ratios at the current levels. Our strategy is very simple. Our SMA portfolio beyond 30 days used to be 3.5 per cent earlier. NPAs originate from SMAs. So, to have better control on SMAs, we started giving marks to our divisions for pulling back these accounts. We formed centralised collection teams for this. Now, our SMA portfolio beyond 30 days is at 0.42 per cent of advances. It is one of the lowest in the industry. A stitch in time saves nine. So, by focusing on SMA accounts, the flow of NPAs is arrested. When SMA numbers will remain more or less at the current level, NPAs will be down.
The measures we have taken – from onboarding to monitoring accounts to recovery -- will ensure that slippages will not be like a flood.
KVB is perceived as a predominantly South-based Bank. Do you want to shed this tag and be known as a pan-India Bank?
In the South, many new districts have been carved out where we don’t have a presence. So, we will be focussing on this region as well as West. Our expansion strategy takes into account the States’ GDP growth. Fifty per cent of the battle is won because people know us in the South. So, by digging deeper, we can get more yield. We have covered the important SME clusters in North, with branches in Ludhiana, Jalandhar, Patiala etc., moving along with the business. We have branches in many State capitals. Currently, we have 858 branches across the country.
Earlier, we were opening 5-10 branches every year. This year, we took a call to open 100 branches – 80 “KVB DLite branches” and 20 normal branches.
Earlier, the branches were full-fledged. But the new DLite branches are differentiated, based on the hub-and-spoke model. For example, two-three DLite branches in a 10 km distance will be linked to a main (hub) branch. Their main task is to mobilise liability and give loan origination leads to the hub branch. Once we see potential in such a branch, it can be converted into a normal branch. We are experimenting with this.