‘RBI rate cut impacts only a percentage of bank’s cost of funds’

Federal Bank CEO says he believes a 25-50 bps cut is possible this year

Published - June 30, 2019 10:33 pm IST

Shyam Srinivasan, MD and CEO, Federal Bank. File

Shyam Srinivasan, MD and CEO, Federal Bank. File

Federal Bank, a leading south Indian bank, envisages to grow from presence to prominence and from prominence to dominance. Its MD and CEO Shyam Srinivasan says that the bank plans to grow organically, and inorganically, if something comes up. However, he says its mantra is from prominence to dominance in Kerala and from presence to prominence in the rest of India. The bank plans more branches across the country by offering various ways of servicing client requirements. The CEO believes in high-quality governance to achieve 18-20% growth per year.

What are your expectations from the forthcoming Union Budget?

Increasingly, the budget itself is not the document based on which the country’s business is run. At some stage, it has moved on — being in a very dynamic world, which is what our country is or the world is — you can anchor around just one event or one policy at a point in time and pretend like the rest of the 364 days is not. So to that extent, these are really living documents, which means it’s reacting to events dynamically. I believe the budget, as it is what I understood from an earlier era, started making a big change. That said, there are certain parameters that we [need to look at]. If they have to stick to the fiscal discipline, then there is not much room for any generous activities. Income Tax collection has to be strengthened, but at the same time, the dilemma is to give some tax redemptions or tax concessions also, to stimulate consumption spending which is a tightrope walking.

I think the budget, in my mind, will focus on ability to broad this (tax net) and increase the number of people who participate in the in the process of nation building, which means you have a lot of focus on widening the tax net.

On the administrative reforms, I don’t think you need some new profound policies, but you need more rigorous administration of all that exists.

Fiscal deficit containment, increasing revenue momentum (meaning widening tax basis), which means better administration of existing reforms and selective enablement of sectors of the market that can spiral growth. This is how I would characterise a budget that generates employment. Employment generation should have a focus around exports, because that is what will trigger the country’s most immediate requirements.

But we have been talking about exports and employment generation for many years; and even growth rate is tardy...

It is true, but in part; we are part of a global world. If there is a slowdown worldwide, it will have its impact on domestic markets. The second would be the financial sector related challenges that have happened in the last 3-4 years for a range of reasons. If you take the budget period, rather than looking at the next five years as a whole, the government must look at it in two to three tranches. So, you have to work on certain realities over the next three years with laser-light focus.

However, incidents like the IL&FS fiasco in the financial sector has affected growth?

I would not say this as a failure, but I would say governance challenges, and never on account of resource challenges. When I say governance, I don’t mean board or anything I’m saying the whole ecosystem. To my mind this incident is more failure of a chain of things and not long term assets funded by short term money which can be the only thing that’s discovered today. Unfortunately, these events happen throughout the country which teach us a lot of lessons. Whether we call it a scam or not, these events happen to us. Every institution will have blind spots. The ability to sight is when you’re outside the process, not when you’re inside the process.

You mean lack of regulatory compliance and oversight?

Somebody has to shake you up and say, listen, this is the price of non-compliance which is too high nowadays. We are to figure out what is the price of non compliance for everything. The price of non compliance, is slow growth for India. Right now, otherwise, we would have been, even in a snowing world, growing fast. But one has to believe that this is in the journey. And fix it, hope never repeats.

Any changes in customer behaviour on repayment of loans?

For years, customers were told, as long as you pay even after 100 days or 200 days, we’re all here to treat you as a customer, provided you pay one day with interest. So the customer, those with integrity, I mean, was used to one kind of behaviour for many years. I’m not talking about those who have cheated. That is a separate story. Our normal retail SME customers are now managing their cash flows. The fact that on the 91st day, assets turn NPAs, if they fail in repayment [is now on their minds].

There was a slowdown in SME sector since demonetisation and introduction of GST. What is the scene now?

Yes, there was a slow down. But I think in the last 12 months many of them started picking up. They said they were beginning to pick up, then there are headwinds from the upstream whom they are dependent on. The large manufacturing organizations are the big players in steel, cement or in power or technology. If they are doing well many of these fellows in the downstream also will do well. While SMEs took time to adjust with demonetisation and GST, the big brother has started facing challenges globally. Right now in some geographies, some segments are doing well and some segments unfortunately are doing badly and it varies as nature of industries have changed. Either supplements or raw materials have become cheaper and another overseas market processing is cheaper. So you buy kernels of cashew from Africa and take it to Vietnam or Thailand and process and sell it in the global market at half the price. I know that many industry bodies are working very closely with the finance ministry, steel, textile, big export sectors. These are of course, continues to be our biggest export sectors, and they need all the enablers they can get.

The Reserve Bank cuts rates but banks are slow to pass it on to customers. Why?

Reserve Bank’s commentary also suggests that there is more room for cuts. And I agree [we should] go for more cuts. I think inflation is fairly under control, but growth is still a challenge. It doesn’t mean that banks will cut rates. A rate cut by the central bank only impacts a percentage of the bank’s cost of funds. I bought very little from the repo. So when the repo comes down, only a percentage of my funding cost comes down, I still pay 4% or three-and-a-half percent or 6%. In some cases, that hasn’t changed. I still pay 7%. So, if I had to cut your deposit rate, you will put it in another instrument, post office savings or government small savings certificate in order, which is giving a higher rate. So to keep you with me, I have to pay you this rate. When bankers are told you’re not transferring the cost benefit to the customer, I’d agree. But transmission takes time.

Do you believe another rate cut is imminent?

The regulator now has many instruments in their hand to do these things. One is signalling by word, secondly rate cut, then they can create other enablers. So the armoury has increased. I believe 25 to 50 basis points cut is possible in this year.

You are a bank that attracts a lot of remittances. What is the present trend?

The last one year, remittances for India has been strong. But the nature of remittances and use of remittances has changed. It is less going into the banking system as savings [and] more going into consumption for regular use because a large part of the remittance that comes from Middle East, after the Kerala floods, has gone into repair and restoration. In the past, it would go as investment. I would think till a few months from now, three, four months up to now, you won’t see big pickup in savings, it will go into restoration. Further, today rupee at 68 is different from rupee and 72. At 72, more money will come in, at 70 and below, people are waiting and watching.

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