Mumbai: Kerala-based private sector lender, Federal Bank is now more cautious than ever on lending to the non-banking financial companies (NBFCs). Following the defaults and liquidity crunch in the sector, the bank has decided not to renew credit lines to low-rated NBFCs, managing director and chief executive officer Shyam Srinivasan said in an interview.
According to Srinivasan, the bank has decided not to lend to NBFCs below ‘A’ rating in order to preserve the quality of its loanbook. In FY19, NBFCs made up 6.9% of Federal Bank’s wholesale book, down 120 basis points (bps) from FY18. Following this, 97% of its NBFC book and 99% in loans to housing finance companies (HFCs) are rated A and above.
“Last two quarters we have been reducing our exposure to NBFCs. We have stopped the credit lines or aren’t renewing the lines and asking them to repay on due date," said Srinivasan.
To be sure, the bank’s total risk-weighted assets (RWA) also declined 1.35% to ₹93,764 crore on a sequential basis in the March quarter of FY19. Risk-weighted assets are used to determine the minimum amount of capital that must be held by banks and other institutions to reduce the risk of insolvency and the capital requirement is based on a risk assessment for each type of bank asset.
“In Q4, there was a Reserve Bank of India (RBI) regulatory change on how NBFC risk weights are calculated. If the NBFC is AAA or AA, then the risk weight is same as that of a corporate loan. Earlier, it was much higher and therefore 100% risk weight came down 20%. So, we had a capital improvement of almost 50 bps," explained Srinivasan, adding that it was a one-time improvement.
In February, RBI allowed bank exposures to all NBFCs, excluding core investment companies (CICs), to be risk weighted according to the ratings assigned by the rating agencies.
“The way it works is that the denominator of the portfolio (total wholesale loans) is growing and so as a percentage it (NBFC loan) has come down. Secondly, as the renewal opportunities or the next line of credit requirement comes, we are scaling down based on credit quality. And the third is that we not originating new loans of that type," said Srinivasan.
In the March quarter of FY19, the bank posted a net profit of ₹382 crore, more than double its profit in the same quarter last year. Its net interest margin (NIM), a key indicator of profitability, stood at 3.14%, down 7 bps from the previous financial year.
“We have said very often that risk adjusted margin is a better metric of both quality of the book and predictability of the income stream," said Srinivasan.
According to him, the bank would like to be closer to 2.8-2.9% risk adjusted margin. “So, if I have to choose between NIM of 3.5% and a credit cost of 75 bps, or an NIM of 3.25% and a credit cost of 50 bps, my bias would be for the latter," he said. The bank’s risk-adjusted NIM was 2.77% in Q4.
On capital adequacy, Srinivasan said Federal Bank’s capital consumption will be about 30-35 bps per quarter, with assets growing at 25% per annum and around 100-120 bps for the full year. “I would say that we are at 14% CRAR, over the next 12-18 months, we may eat up 150 bps and come closer to 12.5% CRAR but then there will be a ploughing of next year’s profit. At this rate, we are well above our own threshold and we have room in tier 2 and therefore have no requirement for capital for at least 18 months," he said.
