No direct exposure to any of the firms that were allotted coal blocks: Shyam Srinivasan

Q&A with MD & CEO, Federal Bank

Federal Bank is one of the few lenders that have been able to improve the health of its assets in recent quarters, despite the uncertain macroeconomic environment. Shyam Srinivasan, its managing director and chief executive officer, remains confident of further improvement in credit quality, despite the Supreme Court verdict on coal block allocations, falling price of the yellow metal and loan exposure in grounded Kingfisher Airlines. In an interview with Somasroy Chakraborty, he elaborates on the bank’s strategy to mitigate asset quality stress. Edited excerpts:

Do you expect the credit quality of banks to deteriorate further, in the wake of the Supreme Court’s decision to cancel all but four coal block allocations? Will this affect the health of Federal Bank’s assets?

Everyone had been waiting for the verdict on coal block allocations. Now, a decisive decision has been taken and the court has given six months (to adopt a new coal block allocation policy). I believe the next few months will be crucial. Various initiatives will hopefully be taken to offset the impact of de-allocation of coal blocks. If no definitive plan is prepared, then there could be a problem. Overall, the verdict is bad news for the industry. But no one wants to sink an industry. Also, fortunately the price of imported coal is coming down. At Federal Bank, we are not too alarmed. We have no direct (loan) exposure in any of the companies that were allotted coal blocks. But we have to be cautious of the indirect bearing of this verdict on the market.

The small and medium enterprises (SME) segment has been one of the focus areas for Federal Bank. Do you expect the apex court’s verdict to affect some of your SME clients, who are suppliers and vendors to companies that were allocated coal blocks?

Our SME business is largely captive to our own market. Supply-chain financing is not a big business for us. We mostly finance SMEs in the services sector. I’m actually optimistic of the growth opportunities in the SME sector. The Prime Minister’s “Make in India” campaign has the potential to open the door of opportunities for the mid-market segment. Going forward, I expect asset quality stress will be less than what we have experienced in the last few years. The period ahead will be better for us.

Are you worried about the declining gold prices?

In March 2013, when gold prices crashed, we had taken a number of steps. Even at the height of the crisis, we did not suffer any loss in our gold loan portfolio. We have moderated the growth of this portfolio to 20-22 per cent. Now, gold loans are around 14 per cent of our overall credit portfolio, compared with 17-18 per cent earlier. Our loan-to-value ratio is around 70-72 per cent. Hence, we are not exposed to price volatility.

You have lent money to Kingfisher Airlines. Do you plan to declare the company a wilful defaulter?

We are examining different options. We have sent a notice to the company, asking them to explain why we should not declare them a wilful defaulter.

How do you plan to improve the asset quality of the bank? What is your outlook on credit growth?

We have taken some difficult decisions. For instance, we decided to go slow, as the environment was not conducive for growth. We had shed bulk credit to diversify our portfolio across segments and geographies. It is helping us to weather any excessive stress in one particular geography or industry. We are hoping for 18-20 per cent credit growth this financial year. The second half of a financial year is always better than the first half in terms of credit growth. SME and retail segments provide good opportunities. We will continue our focus on the mid-market segment. We will certainly not be a lead bank financing projects worth Rs 500 crore or more. That is not our business model.

Do you expect the Reserve Bank of India to keep policy rates unchanged next week?

We expect the (monetary policy) announcement will not have any significant change in interest rate. But there could be a revision in the SLR (statutory liquidity ratio). I don't believe that there is a scope for any significant change in lending rates of banks at this moment. Interest rate is not the issue, credit demand has to improve.