Broad improvement in margins may continue for a while: Bank of Baroda chief

In a Q&A, Sanjiv Chadha, the MD & CEO of the bank, dwells on how the lender fared in Q2 and the strategy it will adopt for its assets and liabilities franchises going forward

Following the Q2FY23 earnings of the bank, Sanjiv Chadha, MD & CEO, Bank of Baroda, spoke to Subrata Panda on how the bank fared in Q2 and the strategy it will follow for its assets and liabilities franchises going forward. Edited Excerpts:

What is Bank of Baroda’s strategy to garner deposits?

When there's an economic slowdown and infusion of liquidity by the central bank, it is perfectly normal for deposit growth to pick up ahead of loan growth and the opposite happens when the economy improves. Loan growth is faster than what is sustainable. So, after a few quarters, we should see the convergence of the trend.

In our context, the credit-deposit growth gap is not so much. Our overall credit-deposit (CD) ratio is about 80 per cent but the domestic ratio is about 73 per cent. So we have enough room to grow our loan portfolio significantly faster than our deposit portfolio for a few quarters. As we move ahead, with the convergence, things will be alright. Even today, there is some part of the legacy book that was created when the liquidity was abundant, which is priced little bit aggressively, in terms of margins being thin. Now as we move along, we can grow our loans but there is also an opportunity to reshuffle the portfolio. So, part of the growth can come from the liquidation of lower cost loans, which was done when liquidity was abundant.

I think we are fairly comfortable in terms of where we are. And I would believe at some point in time, maybe in a couple of quarters, we should see the convergence between the two rates of growth.

So, will BoB not go for aggressive rate hikes to garner deposits?

Not really. Because one has to be conscious of the rate elasticity of deposit growth. At the system level, it is low. And given the fact that liquidity is in the process of normalisation therefore, across the board increases in rates may not necessarily be the best solution to the issue. Targeted rate increases to get the kind of deposits that you want is something that's important. Also, one cannot take for granted that the current level of loan growth will continue indefinitely. So, calibrating the two, making sure that one does not run too far ahead of the other is important.

Are the high net interest margins (NIMs) sustainable?

When we look at the advance’s portfolio, there are two or three broad segments. One is an external benchmark linked, which moves in tandem with the repo rate, and that for us is about 30 per cent of the book. Then you have the corporate loan portfolio, which is MCLR linked, where the MCLR will depend on the cost of deposits. So that will move in tandem with the cost of deposits moving up. So, to the extent you can argue that there's an automatic hedge available between the cost of deposits increasing and that particular portfolio getting repriced. The third part is that over a period of time the repricing lag that is there between deposits and advances that advantage will dissipate. But equally I think it is true that two things will work in our favour. One is that pricing power which was constrained when liquidity was abundant, that will start returning. About 50 per cent of our portfolio is MCLR linked, which is the corporate portfolio. Now that is something where the repricing is really yet to happen in a significant manner. So therefore, I think there's an upside which is there, by way of MCLR repricing, and generally in terms of pricing power coming back to normal as liquidity returns to normal. So, I think a broad improvement in margins might continue for some time.

Is the bank being conservative on the corporate book, which is trailing the retail book?

As a conscious policy, we have been trying to rebalance our portfolio, which is a bit biased in favour of corporate. Corporate is still about 47 per cent of our total loan portfolio. So for retail to assume a larger proportion, is good from the viewpoint of risk management, which is something that we are trying to do, right, that's number one.  In terms of the pricing of retail loans, it is very favourable so pursuing an aggressive growth strategy there helps margins. In terms of corporate, things have improved a lot as compared to last year, but I think there is still room for improvement. We would prefer to be judicious in terms of pricing. As we move to the second half of the year, it will be a busy season so growth should happen. And, in terms of MCLR also, it will start reflecting what should be a normalised kind of rate. To my mind, this kind of sequencing of growth, where retail comes first, and subsequently corporate, is to the benefit of the bank.

Do you foresee stress on your retail book due to persisting high inflation and frequent rate hikes?

I would not believe so. The reason is, what impacts repayment capacity is the interest rate. The kind of interest rate increase that we normally would have seen over one and a half years, because of the fact that inflation moved up, got compressed in almost a single quarter. Now, you can argue that there will be rate normalization, and real rates will probably become positive. Maybe again, some more increases there, but not as much as was there in the last few quarters. Therefore, a large part of the increase that was to happen has been absorbed by the bank, as well as by our borrowers. And so far, we don't see any indication at all that that is resulting in stress.

So, would it be fair to say your net NPAs will be below 1% by FY23 end?

So, I would believe that given the fact that the provision coverage ratio is now upwards of 90 per cent and net NPAs are at 1.16 per cent. I think an arithmetical projection would imply that at some point in time, net NPAs should come to one per cent or lower than that.

When will the bad loan transfer to NARCL happen?

In our case, it’s not a very large figure. So, even when the transfer happens, the impact on the bank would be marginal.

What is your credit growth target for the entire year?

Our stance has been that we would want to grow at market rate or better while keeping a margin intact or improving them. So, I think this is what we have been trying to deliver over a period of time. I think the market growth has been about 16 per cent, we have gone about 19 per cent. And margins also improved a little bit. So, I think that's the kind of stance we would want to continue to grow at market or better while making sure you keep a very tight discipline on margins.