Kathpalia further says he was seeing stress emerging in microfinance and that is reflected in the results. He thought it prudent to create a contingency provision and keep it aside. They may not require it or use it, but having a contingency provision for bad times is a very good way of running a bank that has cyclical portfolios like IndusInd.
The shareholders are saying that it is not turning out to be a happy Diwali for them. IndusInd Bank’s numbers have disappointed on all fronts.
Sumant Kathpalia: You have to see the numbers in detail. Of course, there is a drop in our NIMs. We are at 4.08 against our 4.25. There is a 17 basis point drop. This is a significant drop, but please understand we had slowed down an unsecured business which actually grew negative 6% quarter on quarter and we gave the secured business which grew 4% quarter on quarter. As a consequence, in the microfinance business which is about 10% of our book, which has a 12% higher yield, we lost about 12 to 13 basis point NIM.
The second point is, we have always said granularization of liabilities is critical for us. We continue to focus on granularization of liabilities and we did not stop the liability growth and granularization and as a consequence we grew in a very tough quarter, 4% quarter on quarter and 16% year on year in our retail deposits. We could have slowed down that growth and saved some and the LDR could have remained at 87-88. We went down to 86% and that is a cautious stand we took.
I think the stability of the balance sheet and prudence is much more important at this point of time than just growth. We want to show growth, but we want to be cautiously optimistic in showing growth. There is fundamentally nothing wrong with the balance sheet and our growth.
I appreciate that, but if I compare your commentary of last quarter versus now, nobody saw this kind of caution coming. In 90 days, which is what we are talking about, what has changed for you to in a sense come up with prudent provisioning?
Sumant Kathpalia: Okay, provisioning is a separate issue. I have always thought that fortification of the balance sheet is very important. I was seeing stress emerging in microfinance and it is reflected in our results and I thought it is very prudent right now to create a contingency provision and keep it aside. We may not require it, we may not use it, but it is prudent to have a contingency provision and keeping it aside for bad times is a very good way of running a bank which has cyclical portfolios like ours.
Getting a 2.2% of a book of loans as provisions is a very conservative view to take on the balance sheet.It is not surprising to see that analysts who track your banks have downgraded the estimates. They are raising growth concerns and they are of the view that this stress in the microfinance business is not going to be a one quarter phenomenon. You understand this more than anyone else that when the cycle reverses, it will not be a one quarter phenomenon. Is the reason to get worried about the microfinance business getting into a cyclical downturn for at least three-four quarters?
Sumant Kathpalia: If you ever look at the microfinance business during demonetisation or during floods in Bihar or any other point, I think the microfinance recovery is the fastest. During COVID also, it was the fastest recovery. We must watch out for two things. The thing to watch out for in microfinance, is the funding happening and is the lending cycle improving? I can tell you in October the lending cycle has improved. The loan disbursement process, we were doing 100 crores a day and now at 180 crores a day. So, what we did in the whole of quarter three was about 7,000 crores. We are already seeing a 60% to 70% upside on that number already on the disbursement which we have seen in the first 15 days, so that is very important.
Number two, 80-85% of our centres are viable and functioning at an efficiency of almost 100%. That is a very important parameter in microfinance.
Third, I have always believed that in good times you make provisions and in bad times you take out provisions to manage your credit flows. In my opinion, even if the provision is higher, we have enough buffers in our balance sheet to take care of it. So, the disbursements are coming back. We have enough provisions in our balance sheet to take care of any downside. We are well fortified to take care of the growth as we go forward.
Your loan book for the quarter gone by was below 15%. It is lower than what you have reported in the earlier quarters and also below the guidance that you have shared with us. Are you still comfortable calling out a guidance number for microfinance growth that will have an impact on the aggregate loan book growth for the full year?
Sumant Kathpalia: We have always been growing at the right phase and we have grown 13% this quarter or year to year. It is very difficult to give guidance right now on microfinance. We are seeing growth coming back. We are cautious on our growth, but I think the growth will steadily come back because this is a festival season and I think the half two of microfinance has always been better. I also see vehicle finance growth coming back.
Vehicle finance is going through a very tough period because the automobile industry’s growth is slow. We are seeing some growth, green shoots coming back in quarter two in the passenger vehicles as well as in the commercial vehicles. So, growth should come back in that business. We have never had an issue on the corporate side of the book and in the retail side of the book. So, just leave out the microfinance, which we are still reviewing and seeing what the growth should be, but I can tell you the growth, the disbursements are 70% higher than what it was per day in the last quarter.
That is the only thing I can tell you right now, but yes, our growth should go to about what we have said in a PC-6. In PC-6, we will meet our ambition of 18% to 22%. I think there may be some quarters where we have moderated our growth, but I think that is only fair because the microfinance industry was going through a stress period and we wanted to be cautious about it.
On the ROA side, if you normalise the ROA right now, we are at 1.29 if you just take out the contingent provision and I think if you just add the growth coming back in the microfinance segment and in the CFD which we have already seen, you should see us going to improving our ROA this quarter from what we are.
Whether it is prudent or is in anticipation, a provisioning is a provisioning, which has dented your numbers. That is how markets are looking at it.
Sumant Kathpalia: Yes, the markets can look at it like that. In my view, what is more important as a prudent banker, is that I have to make sure that I have fortified my balance sheet and that is what I have done. I do not want to not do a provisioning and later on say, oh, I did not have a provisioning. I saw some risk and I took the provision. I may not use it.
What will you tell your shareholders if suddenly IndusInd Bank stock is down 15%? They are getting nervous. Would you assure them that business is on track and will come back this quarter?
Sumant Kathpalia: The message which I want to give is, IndusInd Bank is on a solid foundation. I have been saying it time and again. I want to also tell our investors as well as our shareholders that the bank is very well fortified and is very stable. Do not get carried away with the transitory phase which we have done to fortify the balance sheet. Sooner or later, you will see your bank performing at the levels, very soon you will see the bank performing at the levels which you expect it to perform and we are well on our way to do that.
The market reaction is that five out of the last six quarters, you have come out with good numbers. Markets thought that the turn was real. You were growing at a rate higher than the industry average. Everything was just going fantastically well for you. And then comes this quarter. On a standalone basis, the numbers are bad. The markets want to understand what you have reported for the quarter gone by, is not a trend.
Sumant Kathpalia: I do not think so. But you cannot anticipate the growth at this stage. If the microfinance industry suffers much more stress than what we are seeing right now and the growth does not come back, then I think we will have to find other ways to grow our business. But microfinance, which is 9% to 10% of our book, has a 23% yield and is a significant contributor to our revenues and the NIMs at this point of time.
So, while I agree with you, I think there is a divergence to what we said and I think we did it basis prudence right now, but in my opinion this was the lowest quarter, in my opinion, on microfinance. About 60% of the business happens in the second half. And even if it does not come to the normalised level, you will not see a declining trend, you will see an upward trend on that business and overall, in our business as a consequence.
Let us work with an assumption that the business goes nowhere and you consciously do not grow it or the business does not come back the way you are anticipating. Then, what happens to the overall loan book and the overall NIM picture for FY25?
Sumant Kathpalia: It is very difficult to substitute that. We have other businesses which are at 20-23% yield. For example, we have diversified the microfinance business into a merchant acquiring business. We can scale up that business and get another Rs 2,000 crore of growth out there to take care of that shortfall if there is any in the microfinance business. So, we have a lot of levers in our hands. We have slowed growth on credit cards and PL. We can scale up that business to make sure that an unsecured business remains within the range, within the parameters which we have set for ourselves. So, we have enough levers to do that.
In order to commit a NIM right now and saying that we will go back to 4.25% will be very difficult for me right now. I do not want to give guidance on that. But I can assure you this is a transient phase and not a permanent issue with the bank. So, it may last for a quarter or so, but we should be back in our business.
What does that mean for your capital requirement? How are things positioning in terms of your total statutory requirement given that your provisioning has gone higher and you would need capital to maintain your historical growth rate of above 15%. If you are planning to grow at 15-16% and providing for additional liability, NPAs are going higher, that means you would require capital sooner than later.
Sumant Kathpalia: So, we are at a CET of 15.6%. I really feel that we will evaluate the requirements when we touch 14%. We will evaluate the capital requirements in March, I do not think we have a need right now, and one quarter does not change our assessment of the capital, and in my opinion, maybe in the quarter three results and quarter four you may have a different commentary for us.
Well, it may be a bad quarter, but a bad quarter does not mean that this is the new normal for IndusInd Bank. Form is temporary, class is permanent and I would like to believe that for IndusInd Bank, this is a bad patch. All good players go through bad forms, but class always comes back. Mr Kathpalia has steered the ship post COVID quite brilliantly. So, focus on the good. Yes, markets are disappointed. I think some financial adjustment is happening.
Sumant Kathpalia: Just one last message. It may be repetitive, the bank is in very good shape. I seriously feel this is a transient measure which we have taken for fortification of the balance sheet. The bank remains fundamentally very strong and is poised for what we have set and we will deliver the PC-6 ambitions which we have set for ourselves.