K Venkataraman, MD & CEO, Karur Vysya Bank, answers Seasonal Magazine’s queries on KVB’s performance as well as battle-plan for FY’13, in this exclusive interview:
You have posted an impressive set of numbers. What have been the main challenges that you overcame for this balanced performance in both interest and non-interest income as well as operating and net profits?
Yes, the achievement was against significant challenges. The economy is going through such a difficult phase that maintaining good asset quality is the number one challenge. KVB is more of a traditional private sector banking model, where decades old customer relationships holds the key. We can’t just pass on all rate hikes to our loan customers. Because, if we do so, we will be contributing to weakening the quality of these assets. So we have had to compromise on margins. But yet we could present good numbers due to our focus on volumes.
Your Net NPAs have shown a QoQ up-tick. Is it going to ease from now on?
It has to. This time, our provisioning was lower on a QoQ basis. Also, gross NPAs as well as gross slippage ratios have shown improvement. I think that if we keep vigil on all aspects of asset quality, Net NPAs should improve from now on. NPAs are a double whammy for us.
Net Interest Margin has shown a decrease. Was it solely due to the high cost of funds?
Yes, that has been the main component. As I said earlier, we could have clung on to our margins, but at this point of time we really felt that it is a time for compromising, thus avoiding pressure on assets. For example, textiles is a sector where we have good exposure, and it doesn’t make much banking sense to stress an already stressed industry like it. On the other hand, we at KVB believe that if we assist them now, they will come out of this situation without much damage.
Was the high cost of funds specific to KVB, or it was just what the whole sector experienced?
Higher cost of funds applied to the whole sector. Due to hikes in Repo rates and the increase in G-sec benchmark rates, the general rate scenario turned high. With liquidity becoming tight due to tightening monetary policy, the cost of funds increased. CASA balances migrated to term deposits due to prevailing higher term deposit rates, thus further increasing the cost for us.
You mentioned NPAs being a double whammy for the bank. Can you elaborate?
Well, by definition, NPAs are not generating any revenues for us. But recent changes in the regulation to manage NPAs has made it a double whammy for banks. We have to deliver a high percentage as provisions to cover them. This has made NPAs a very tricky situation to manage, and that is why we have made the maintenance of good asset quality as our principal strategy.
Are you continuing your focus on safe bets like working capital loans, or are you attempting a wider portfolio of credit growth?
This focus on working capital loans that you mention, is, in fact, due to an earlier decision to diversify. KVB was more into providing term loans, but since the last two years we consciously focused on growing our working capital loans, and that has made the situation much more healthier.
Your Capital Adequacy Ratio has become more comfortable. Up to what period will that avoid a further capital raise?
Yes, we are at a very comfortable situation as far as capital is concerned. In fact, even if we are to go in for Basel III compliance, I would estimate that capital would be enough for another 3-4 years. The Rights Issue that we did last year proved to be the right strategy. Even if the economy doesn’t improve, and provisioning requirements go up, our CAR should be sufficient for more than 2 years.
Are you satisfied with the QoQ growth in advances and deposits, or more work is required on this front?
The growth in advances was pretty ok, especially when you consider the kind of low appetite that was there in the country from high quality customers. But I am not satisfied with our deposit growth, especially on the CASA front.
What all are KVB’s main battle-plans for FY’13?
I think we already covered most critical elements of our battle-plan. Firstly, the focus will be on maintaining and bettering our asset quality, as we feel that this will be the game-changer in the days to come. If we can do this without affecting our growth metrics like CAGR, well and good. But asset quality will be the prime focus. Secondly, as I said, we have benefited from diversification, and we need to diversify much more on the credit side, especially in segments like auto and home loans. Thirdly, we are having nothing short of a war-cry on the CASA front. Today, we are a tad less than 20% in our CASA ratio. But rather than disappointed with that, we have identified it as the perfect room for growth in our overall scheme of things. With a higher CASA ratio, say 30 or 35% within the next 2-3 years, KVB will be in an enviable position.