We charted 3-yr, 5-yr, 8-yr plans for growth: CSB Bank's Pralay Mondal

"Growth will be paramount at the end of the day", said Pralay Mondal

Fairfax-backed CSB Bank is targeting emerging corporates and the NBFC sector. The transition should take a minimum of 18-24 months, Pralay Mondal, managing director (MD) and chief executive officer (CEO) (interim) told Bhaskar Dutta in an interview. Edited excerpts:

CSB reported a firm set of numbers in the first quarter with net profit almost doubling on the back of strong interest income growth. What is your guidance on credit growth for the year?

I am quite optimistic about credit growth. We started this quarter on a year-on-year (YoY) growth of around 16 per cent. We should be able to do better than the whole year. Don’t read too much into the YoY profit growth because the base was very small last year. It’s too early for our bank from a journey perspective to look at year-on-year or quarter-on-quarter numbers. I think what we should look at is how the operational efficiencies and operating profits are growing. Also, how the credit growth is going to happen, how the balance sheet is growing and what are the products and services we are launching.

Could you share some light on the roadmap for bringing down the promoter stake of Fairfax, which is 49.72 per cent now?

I think, we need some understanding because we have not asked for clarification but we assume that the promoters — which RBI gave some clarifications — at 26 per cent after 15 years. So, I’m just assuming that is applicable to us as well. We have not asked for any specific clarifications because 15 years is a long time. We don’t need to get too worried about it. But Fairfax’s stated objective is, it doesn’t want to dilute unless (it has to) regulatorily. It is not in the business of diluting. In public, it has said that it wants to hold it as long as regulators allow it to do so. It is not in the business of selling and making profits.

What is the future strategy on non-interest income and operating profits? The bank saw a decline in non-interest income last quarter as bond yields rose sharply. How do you plan to navigate the rising yield environment?

Our available-for-sale (AFS) portfolio is miniscule and we had intercepted this last year itself. We managed (the rising yield environment). Unlike some of the larger banks, we don’t have that problem (of large marked-to-market exposure). Our problem is the reverse. Our balance sheet is so small that given the perspective, a little bit of a change creates sensitivity too high. Our treasury income was very high last to last year and some part of last year. Even if you don’t have an income (now) that itself is a problem, right? So if you look at it, in the last quarter, actually our treasury income was positive and had some component which was not market related. Some of these SR (security receipt) portfolios and some of the other portfolios are there. From that perspective, I think the last quarter was flattish for the treasury. And, that’s what created an issue. Also, last quarter we didn’t book any PSLC (priority sector lending certificate) income. We are actually net positive on PSLC generally. Even now, we are net positive on PSLC. We generally buy a little bit of the PSLC on the micro side and we sell PSLC on agri and others. And net, we make profits on PSLC. Since rates were very low this first quarter, because the demand was low, we almost bought for the full year. Now, whether we’ll sell it in Q2 or Q3, we don’t know yet. Whenever we get the right rates, we’ll book it. That is another tactical reason why our non-interest income was low. Our focus is core and non-core; non-core is treasury and PSLC, and core, basically franchise income, will continue to do well for us. We will be bettering the 17 per cent on core non-interest income.

With the RBI in the midst of a tightening cycle, what is your outlook on interest margins as deposit rates see upward pressure?

On NIMs (net interest margins), in the last year also, we said that these are one-offs — you know, 5.45 per cent, 5.27 per cent and 5.27 per cent, annually. And, for the quarter, it was 5.45 per cent. Those are one-offs, really. Last year, it was on the back of a smaller growth. When you don’t have an opportunity to grow, you maximise your returns. That’s what we did. Ultimately, these are ratios. This year, we want to start focusing on growth. We are not looking at this bank on a quarter-to-quarter basis or a year-on-year basis. We are looking at where we want to be in the year 2030. I have three-year, five-year and eight-year visions. From that perspective, I think as long as we are between 4.5 and 5 per cent (growth), we are quite happy. And, I think as the franchise becomes larger, it’ll come down to 4.5 per cent. It’s because that’s where the best banks in the system are. We cannot be an outlier.

How the credit growth is going to happen, how the balance sheet is growing, what are the products and services we are launching.

And how the entire franchise is picking up. I think that is more relevant.

Our treasury income was very high last to last year and some part of last year. Even if you don’t have an income (now) that itself is a problem, right? 

So if you look at it, in the last quarter, actually our treasury income, while it was positive, had some component which was not market related. Some of these SR (security receipt) portfolios and some of the other portfolios are there.

From that perspective, I think the last quarter was flattish for the treasury. And, that’s what created an issue. Also, last quarter we didn’t book any PSLC (Priority Sector Lending Certificate) income. We are actually net positive on PSLC generally. Even now we are net positive on PSLC.

We generally buy a little bit of the PSLC on the micro side and we sell PSLC on agri and others and net we make profits on PSLC. Because rates were very low this first quarter, because the demand was low, what we did is that we almost bought for the full year.

Now, whether we’ll sell it in Q2 or Q3, we don’t know yet. Whenever we get the right rates we’ll book it. That is another tactical reason why our non-interest income was low.

Our focus is that core and non-core; non-core is treasury and PSLC, and core is basically franchise income - will continue to do well for us. We will be bettering the 17 per cent on core non-interest income.

CSB is looking to diversify from the traditional dominance of the gold loan book. Which are the sectors you are looking at?

We will be primarily a retail and SME bank. The reason for that is not that we don’t like wholesale. Given our size at this point of time, unless we become a sizeable balance sheet, we won’t be able to penetrate or we will not be able to actually address a lot of wholesale clients.

Hence, we have to play in the mid-market, emerging corporates, NBFC sectors and all of these sectors mostly.  You need the right systems, you need the right products, the right technology and the right ecosystem. These typically – and I have done enough retail in my life to tell you that at a bare minimum you need two years to create these building blocks.

So as we are talking, we have just given an order for LOS (Loan Origination System). We are (also) finalising our LMS vendor.

We will relook at our core systems. Because we are on a core system which is good for us for another few years, but if you want to start a journey from here you have to create for the next 20 years, not for the next two years. We need to look at that. As we are talking, we have given the corporate LOS to our vendors. Corporate LOS not so much for corporates but more for SME kind of businesses.

We are going to look at API integrations and those kinds of things. This is a minimum of an 18 to 24 month journey. Do we not do any business still then? The answer is no.

You recently spoke about enhancing the gold loan capabilities – at present it is around 41 per cent of the portfolio. What is the strategy for the year and have the legacy asset quality issues on gold loans been resolved?

Yes, that was resolved last year. By the fourth quarter most of the issues were resolved. So, we had something like this – the Q1 and Q2 slippages went up. Q3 it came down and Q4 we completely repaired it and we had a negative credit cost. Q1 this year also, we had effectively a negative credit cost. Though very marginal. It’s almost flat.

Obviously, we’ll not have a negative credit cost, because that’s not healthy also. Or gross NPA, which was last year 1.8% and net NPA 0.67%, I think, in this quarter we came down to 0.6% and 1.7%.  I think we will be below 2% and we will be below 1% - for gross NPA and net NPA, come what may.

We should be somewhere where we are in net NPA and somewhere between 1.7% and 1.8% to 2%. Hope we’ll be closer to where we are right now. We are not seeing too many slippages in our portfolio. So, I see it to be quite low. It will not be negative but it will be quite low.