The outlook on the Indian economy looks positive. There are green shoots visible in the economy with capacity being built in sectors such as logistics, pharma and healthcare, says KVS MANIAN, Whole-time Director, Kotak Mahindra Bank.
In an interview to HITESH VYAS, GEORGE MATHEW and SANDEEP SINGH, Manian says the current acceleration in inflation is due to transient items such as tomato and onion prices, and is unlikely to go out of hand. He feels the repo rate will stay at the current level. Given the tight liquidity condition, he believes that deposit rates may go up by 25-50 basis points over the year. Excerpts:
Given the global scenario, what is your outlook on the Indian economy?
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Generally, the outlook for India looks positive. We will grow in the 6-6.5 per cent range (for FY2024). There has been some worry about food inflation but I think it is mostly coming out of transient items like tomato and onion prices. I am not overly worried about inflation getting out of hand. It may be slightly more than expected at the beginning of the year but may not be high enough to warrant significant policy turnaround. It also means that policy rates will stay where they are. With inflation remaining elevated, the reduction (in rates) is out of the question.
However, the market rates will be slightly higher than what policy rates indicate. My sense is that the liquidity in the banking system will be marginally tight, and therefore, the deposit costs will tend to rise.
There are talks about a monsoon deficit, which means food inflation can remain high. Do you think there can be some tightening by the RBI if inflation persists?
I do not see them (the RBI) raising rates at this point in time. As I have said, if food inflation is contributed by transient items, I don’t think RBI will react unless they believe that it (high food inflation) will affect the core food items.
How much increase are you seeing in deposit rates?
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It is difficult to answer, but you should look at a 25 to 50 basis points (bps) rise in deposit rates over the year.
Will this put pressure on net interest margin?
NIM (net interest margin) is a combination of multiple things. If you ask, will there be downward pressure on NIM for the banking system? The answer is yes. But having said that, remember that on the asset side, you (banks) will also be able to pass on some rate increase (to borrowers). If costs rise, banks will try to pass it (rates) on. Banks will need to manage their NIMs. The actual impact on NIM will change from bank to bank depending on how well they manage the mix of their asset and liability sides.
The government is saying that private capex has started taking off. Do you agree with this?
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We are seeing green shoots. All corporates are talking about investments, and it is a matter of time before investments start coming in. There are sectors where investments are beginning to happen. Some sectors like renewables, roads and infrastructure have seen investments even during the last few years. We have seen capacity being built in sectors such as logistics, pharma, healthcare and chemicals. For capex to take off, big corporates from sectors like cement and steel need to put up big capacities, which is probably still some time away.
Where are you seeing growth opportunities?
At the sector level, the whole industry is banking on retail to grow rather than on corporate. If you look at corporate loan growth, excluding bank lending to NBFCs, it has been in single digits for the past many quarters. So, the overall banking sector has relied on the retail segment to grow, and I don’t think that will change immediately.
Most corporates are deleveraged and sitting on cash. Even for small brownfield investments, they are using cash that they already have. Only large greenfield investments could bring back corporates to borrow from the market, but this will take time. In the interim, I think the reliance will be on retail to grow.
How do you see growth in your corporate loan book?
In corporate loans, we have always maintained that we are fine with a growth of 15-20 per cent. Our market share in the corporate segment is 2.5-3 per cent, and we don’t see any problem in gaining some more market share.
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Earlier, we had targeted large corporates, which we call corporate conglomerate group (CCG). We have made good progress in the segment and improved our market share. But beyond a point when you keep growing in the same segment, there is a worry about concentration risk. Our current strategy is to grow the segment below that – large and mid-corporates. It is a segment where you can easily have a 10 per cent share in lending; it gives us a good wallet share in multiple products and services of the corporate. We feel that the right risk-adjusted returns can be made in this segment, and we want to grow it.
You have earlier mentioned competitive pricing pressures in corporate loans. How is the situation now?
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From our perspective, we are highly focused on risk-adjusted returns and always look at pricing vis-à-vis the risks that we take. Therefore, I would expect tenor and lower ratings to be priced well.
But yes, we do see irrationality in that (pricing of loans). I don’t think the markets are pricing it well. Competition can drive you to be irrational because you want a deal and book growth.
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As the cost of funds are likely to have an upward bias from here on, I hope it will drive more rational behaviour among banks as they will have to build their costs into pricing. I am seeing pricing getting more rational going forward.
Are you seeing any signs of stress in corporate or retail sectors?
Not at all. One good thing is that the credit quality and asset quality environment look as good as it can get. We aren’t seeing any stress on the corporate side, absolutely zero. If you see the industry data, of course, there is some increase in stress on the retail side, but it is nothing to worry about. There is a marginal increase in stress levels in unsecured loans.
What are your strategies to grow your unsecured loan book?
Our unsecured loan portfolio is smaller than others in the industry. We had cut down our unsecured lending even before Covid, as we witnessed some weaknesses there. As we entered Covid and got out of it, our unsecured loan book was sub-5 per cent of our total balance sheet. We have been giving guidance that our unsecured book at 5 per cent is too low, and we would like to take it to mid-teens. We are already getting close to 11 per cent. Currently, we acquire 30,000-35,000 retail customers daily, largely either millennials or mass customers, and that has a propensity profile of spending rather than investing. The first product they look for is a credit card or a personal loan. We wouldn’t have lent to them a few years back, but with analytics and better underwriting processes, we now want to. We are also focusing on salaried customers where our share has been low. These customers also want a credit card or a personal loan. Our experience in the microfinance segment has also been good.
From the point of view of the management of NIM, we think the percentage of (unsecured loans) needs to go up. Given all this, we are clear that we want to continue to build the unsecured business, as we feel the risk-return trade-off is reasonable.
How is your credit card portfolio performing?
We intend to grow our credit card portfolio. We have steadily gained market share here both in issuance and spends. We want to be among the top three issuers of credit cards on an incremental basis. It is a focus area for us to grow. We want to focus on creating a preferred brand in this product. Our portfolio is doing quite well. We are trying to grow in all three segments – new-to-credit, salaried and higher-end.
Are you seeing delinquencies in the MSME sector rising, especially after interest rate hikes?
We are not seeing any signs of delinquencies in our MSME portfolio. If I compare our emergency credit line guarantee scheme (ECLGC) vis-à-vis the non-ECLGS portfolio, we do not see any difference. In fact, by providing ECLGS relief, we have been able to maintain the quality of the portfolio. From an industry point of view, we are seeing some marginal increase but not a vast stress level. All banks are focusing on the MSME segment for growth. If there were that much stress, they wouldn’t be focusing on it. Most other banks are also not seeing any specific reasons to worry about the MSME portfolio.
Has the rise in interest rates impacted microfinance loans?
Microfinance is more or less a fixed-rate product. Actually, the rates don’t fluctuate much in products like microfinance, personal loans and credit cards. We don’t modify the rates in these segments that significantly. In our case, we are seeing pristine quality in the microfinance portfolio, no stress at all. The post-Covid portfolio quality has been quite good, even for the industry. So, it doesn’t look like there is any stress.
Are you comfortable lending to the NBFC sector?
We have always been conservative and never had any bad experiences in the NBFC sector. I think the sector is much safer today than it used to be in the past. It can attract capital quite easily now. There are private equity players willing to fund NBFCs due to their potential. We are quite positive about the sector.