Corporate & Mortgage Loans will be growth drivers in FY23: Sanjiv Chadha, MD & CEO, BoB

Sanjiv Chadha, Managing Director & Chief Executive Officer, Bank of Baroda, talks about his outlook for the banking sector in FY23, credit cycle and its growth, SME loan growth, interest rates, banks bond holdings, FD Rates, NIMs, NPAs, the JV with BNP Paribas Asset Management India and wealth management space among others during an exclusive interview with Swati Khandelwal, Zee Business. Edited Excerpts:

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Q: How FY23 is looking to you for the banking sector and how you are geared up for the new financial year?

A: If we will talk about the broader economy then there is an improvement. If there is an improvement in the economy then it is definitely beneficial for the banks. Secondly, we have also seen the process of normalisation of the interest rates, so, as interest rates turn normal, the banks will be benefitted a bit. So, the new financial year will be better than the financial year that has ended.

Q: How is the credit cycle currently? Which segment is seeing credit growth and where is credit growth lagging? What kind of credit growth outlook have you planned for?

A: As far as the credit cycle is concerned, the credit cycle is getting better over the last few quarters, especially, the corporate credit cycle. There has been a lot of improvement in the trade quality and NPS, to some extent this improvement was not clear to us as COVID was there but the process of improvement is going on for a long time. There are indeed certain parts of the economy and our customers like SMEs, where there is still some weakness. Things are improving but we cannot be sure that the situation has normalised. But if we have a balanced look at it then because the large corporate book of the banks is bigger. If you have a look at the Bank of Baroda then about 50-60% of the loan belongs to the corporate segment. The impact of the improvement in this segment will be much higher than a slight weakness if it is somewhere. Therefore, I believe that with the improvement in the corporate trade cycle, there will be an improvement in credit growth as well as the bank's trade quality which will lead to an improvement in the bank's profitability. 

Q: In the Previous quarter the SME loan growth was just 2.4% and the corporate loan was almost flat but you are saying that there will be a recovery. Can you please provide an idea of the kind of growth we can see in the first quarter and subsequently in the second quarter and how do you foresee the corporate loan growth by the end of the year?

A: If we will talk about the overall loan growth then I feel that we will see 8-10% loan growth in the financial year that has ended now. If we talk about the new year then definitely, there will be double-digit growth in the loan book and it may be in the range of 10-12%. So, the growth will be better as compared to the last year. Interestingly, this growth/improvement will be seen in every segment, i.e., incorporate and MSME. The MSME growth - we saw around one-and-a-half-year ago - came mainly due to the loan guarantee scheme. I think that at a time when the economy is improving, organic growth will also be seen in MSME along with corporate and mortgage loans. These are going to be the mainstay of growth for the next year.

Q: What is the view on interest rates going forward. With inflation inching upwards and global central banks getting into tightening mode. How do you expect interest rates to move to India in the coming few months? 

A: If we talk about interest rates then its possible direction depends on 3 things

(i) Interest Rate Cycle: it is natural that whenever there will be an improvement in the economy then the interest rates will get back to their normal ranges because they reduced when there was a decline. So, some interest rates will increase from the perspective of the interest rates cycle and it is a normalisation of the interest rates.

(ii) The question is how much increase can be there? It depends on the factor that how much did the central bank reduced the rates when there was a weakness due to COVID. So, we have seen that the interest rates went down to almost zero levels in the US and Europe. But in the case of India, the interest rates were brought down but the proportion was very less. As we did not see a huge reduction in the interest rates in India, so, when the process of increasing the rates will start then it will not be that huge. Fed is saying that there can be five rate hikes within the US but in the case of India, I feel that there can be two rate hikes in a year. So, the interest rates will be normalisation interest rates will rise a bit and the pace of its rise will be less than the rest of the world, therefore, the business will not face difficulties in adjusting themselves.

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Q: What will be the impact on the bank's bond holdings as the interest rates move up?

A: As far as the bank bond holdings are concerned, as we discussed earlier that it will depend on how much increase can be seen in the interest rates and the pace at which it will happen. So, to an extent, we have seen some of the bond rates go up with an expectation that the interest rates will go up. Around six to eight months ago, the bond rates stood at around 6% for a 10-year bond and now, it has gone up to around 6.75%, which is an increase of 75 basis points (bps). For the coming year, it is estimated that the interest rate may reach around 7.25% by the end of the year. So, if we will talk about the next one to one-and-a-half years in which we will reach from 6% to 7.25% then around 60% of the increase has already been witnessed in the bond rates. So, this rise, whatever is visible, will not be quite disruptive but we can sense some increase in the coming future.

Q: Your Bank has already started raising FD Rates. What is the reason for this and are there liquidity issues? 

A: Liquidity is still enough in the market and when we talk about normalisation of the interest rates and when it happens then it has an impact on loans as well as on deposits. But it had been mostly seen that the loan rates go up first while deposit rates follow it after some time. So, I think, we will see both of these things. Interest rates will be normalised in the coming year in which loan rates will increase a bit and deposit rates will also go up. It is a process of normalisation, it does not mean that liquidity is tight. Sufficient liquidity is available in the market.

Q: In Past few years your company has focused on growing CASA deposits while shedding high-cost bulk deposits and term deposits. Has it also resulted in improving NIM? What is the strategy now and how much more improvement should we expect in NIMs?

A: When the economy was a bit weak, the rate of growth of loans could not be that high. So, whenever you want to improve the NIMs then your focus will be more on liability management so that your deposit rates are aligned well. This, the way we managed the deposit rates, was also a reason that increased NIMs. But now, when there will be an improvement in the economy then I feel possibly the improvement in NIMs, to a certain extent, will come from loans. As the interest rates are normalised the loan rates should increase. There will be a rise in deposit rates but will be a slightly low pace. These two reasons are (i) loan rate rises happen first and (ii) there is an improvement in the pricing power of the corporate sector, which will lead to a slight improvement in NIMs.

Q: The banks, especially the PSU banks have faced concern about NPAs in the last few years. Can we now say when we enter FY23 that the worst is behind us and a lot of things have been cleaned up across banks? BoB is the second-largest public sector bank, so, how better is the situation after the amalgamation or still do you feel that something still needs a cleanup? 

A: As I said in the beginning that an improvement is going on in the corporate trade cycle for a long time and if you will have a look at our last three to five quarters then the gross NPA and net NPA have come down in every quarter, respectively. This is because there is an improvement in the corporate trade cycle and the banks have made provisions for their NPAs. If you will have a look at the loan provisioning then it stands at around 80%. So, whenever a loan turns into a bad loan then it definitely makes some losses for you but provisioning, possibly, of equal or more than the losses that can happen has been made. Therefore, in my view, it is less likely in the near term and the medium term, that the loan provisioning there can be an impact on the bank balance sheet. You spoke about the bank's hesitation in lending then I feel it might be wrong because if there is a hesitation then we would have not witnessed that the banks are providing loans at such low rates. The banks are providing loans at such cheap rates just because the banks have more liquidity than the demand they are getting as well as abilities to offer the loans. Going forward, in my view, the loan demand will increase as there will be an improvement in the economy and the bank is fully capable, both in terms of liquidity and also according to risk appetite. So, there should be a growth in the loan and the bank can provide the support that the economy will need from the bank completely.

Q: This means good days are back for the bank?

A: I think, good days for the economy are back and along with that the time will also be good for the banks.

Q: Recently the company has formed a JV with BNP Paribas Asset Management India where Bank of Baroda will be having 50.1% stake. Tell us about the JV and how does it will help your bank?

A: There is a huge potential in the mutual fund space and we have seen good growth in the domain. So, we thought if we have to capitalise on it then we should put our best foot forward. Secondly, this is the world of collaboration, therefore, we should have a look at it from the same perspective (i) the mutual fund business is buoyant and we have to capitalise on it and (ii) how can we create a partnership that will benefit our customers. So, we are seeing a trend that our customers, mainly, the high net worth individuals, are trying to diversify their portfolios. We are looking not only at the Indian markets but also at the companies which are present in the international markets. So, especially in that context, our collaboration with BNP Paribas will benefit us a lot and our customers will have the facility to take exposure in the international market. Secondly, BNP Paribas is a reputed bank and has a very good experience in bank exposure. So, our mutual fund business to an extent is bank assurance-based, which means, our distribution happens mainly through the bank. So, in both contexts, the business model, buoyancy in the mutual funds and international perspective can benefit our customers. Due to these three factors, our business will be benefitted a lot due from this partnership and even our customers will also be benefitted from the same.

Q: Wealth management is a space where the bank has taken certain steps. What kind of response have you received on that front and what are your growth plans for wealth management and what focus the bank will have on it?

A: If we have a look at our customers then they are from all the sections and we are trying our best services to the customers from every section. So, if we will talk about the franchise of the BoB then it is a very valuable franchise and more than 20% of our deposit is held by our 0.2% of customers. So, it is a good opportunity for private banking and wealth management. Earlier, as well we had a business named Radiance and we are increasing it and are recruiting around 500 wealth management professionals. This will be beneficial for us to serve our high net-worth clients and the upcoming middle class that wants to not restrict their portfolio just to bank deposits and it will be quite beneficial for the purpose. Their quality of service will also improve and we will be able to fulfil their requirements related to investment and savings. In my view, it is an important thing in the context of the public sector bank because we have to ensure that it is our responsibility toward financial inclusion as well as providing the best services to the rest of our customers.