South Indian Bank mulls multi-pronged approach to return to profitability

Thrissur-based South Indian Bank (SIB) is working on short- and medium-term growth strategies to remain competitive in the new and changed business environment. Murali Ramakrishnan, the new Managing Director and CEO, who brings with him a lot of exposure to retail banking, has identified many focus areas, including beefing up of capital to strengthen the balance sheet, focused drive on building strong and low-cost CASA book, leveraging of the strong distribution network to increase business, strengthening of NRI relationships, and augmenting the talent of young resources. Edited excerpts:

As per the strategy of the bank, the corporate portfolio was consciously de-grown and is presently at 25 per cent of the total advances portfolio. Also, the stressed accounts in the large corporate book which were identified, have either turned into NPAs or have been sold off to ARC barring a few, which are closely monitored.

Going forward, the focus will be to continue to grow retail, MSME, SME and agriculture with a selective corporate focus. We expect the need for provisioning to be lesser as the risk will be diversified. Select business focus and diversification of advance portfolio will ensure that the stress on account of provisions will be minimal, thus contributing to sustained income and investor confidence.

It has to be noticed that the operating profit has grown from ₹525 crore to ₹1,645 crore in the last 10 years at a CAGR of 12 per cent. The focused approach on increasing the CASA and growth in high-yielding advance products will improve the net interest margin (NIM) to the desired levels.

Further, strengthening the core fee income through advanced technology initiatives and improving the income from the bancassurance tie-ups and other third-party businesses will further improve the profitability of the bank.

On account of the impact of Covid-19, the bank expects credit cost to be on the higher side for two years, including the current financial year. This might pull back the profit for the year, but the same is expected to get compensated with higher net interest income and non-interest income during the (coming) years.

The bank has initiated a focused approach to identify avenues for income generation and cost reduction. On account of all of the above, ROA (return on assets) is expected to grow at a higher pace and achieve the desired level of 1 per cent by FY2024.

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Given the current uncertain pandemic environment, our top priority is to strengthen the balance sheet to take on any possible hit from this uncertainty. Raising capital will be done in multiple tranches ― the first tranche will be to strengthen the balance sheet, and the balance tranches will be for growth opportunities. Shareholders’ approval to raise ₹1,250 crore through equity and debt is in place.

The bank has appointed a merchant banker for advising on capital-raising activity. The quantum and route of the first tranche of capital-raising is under discussion. The intent is to raise the first tranche of capital by next quarter with a deadline of March 2021. This decision will be taken by taking into account the dilution risk for existing shareholders. The endeavour is to raise capital with minimum possible dilution.

We envisage limited growth opportunities in the balance part of the current financial year. Hence, we would be raising subsequent tranches of capital for growth opportunities at an appropriate time in FY2022.

The pandemic has realigned many conventional business models. This presents an opportunity for learning fresh ideations and unlearning the concepts that are no longer viable. We have used this period to strengthen our digital infrastructure and innovate process flows that can offer uninterrupted banking services to customers even in a challenging environment.

The bank is carrying out detailed cost-benefit analysis of the existing branches and has identified some branches which can be merged. Further, we are in the process of identifying locations where there is high potential for CASA and retail loans. The bank will look into opening new branches in those locations. There are also plans to have clusters of branches at different locations with specific focus on retail loans and CASA.

Our staff productivity is closely measured and if there is a need to increase the staff strength in the next two years in order to improve the processes at the operational level and strengthen the product sales and collection mechanism, we will do the same. Competency building of personnel will be another point of focus through various development programmes and training sessions.

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The present system followed is robust and a complete restructuring may not be warranted. But, of course, management has done a thorough study on the system and will make a few modifications by bringing in specific verticals in assets and liabilities to bring in sharper focus, strengthen the on-boarding and underwriting process of the new customers, identify new high-yielding loan products to improve the NIM, and focus on digital sourcing for both assets and liabilities by leveraging the strong technology infrastructure.