We are on the path of recovery, says Bank of Baroda CEO Sanjiv Chadha

Broadly the trend we have seen is that retail is growing faster than corporate loans, said Chadha

State-owned Bank of Baroda (BoB) believes margins could improve during the current financial year (2022-23, or FY23) as interest rates normalise. SANJIV CHADHA, managing director and chief executive officer, BoB, in conversation with Manojit Saha, says credit costs will continue to taper off, improving profitability. Edited excerpts:

BoB has reported 18 per cent growth in global advances in the first quarter (Q1) — higher than the industry. Will that trend persist in the second quarter?

We are seeing strengthening in terms of growth trends. Growth is likely to be better than last year. However, it is equally important to remember that Q1 of last year was unnaturally depressed due to the second wave of the pandemic. We can see some moderation as far as growth is concerned. Yet, it will be significantly better than last year.

Corporate loan demand has also improved. Have you seen demand for greenfield projects?

Over the past few years, there has been a consolidation trend in the industry. There is capacity concentration among stronger players. A lot of investment demand has been coming from stronger players. While demand is there, it is still subpar. As we move forward and capacity utilisation improves, a large proportion of demand will come from these sectors. This augurs well for the quality of credit.

As far as retail credit is concerned, the bank has seen good growth in unsecured personal loans.

Broadly, the trend we have seen is that retail is growing faster than corporate loans. That trend will sustain. Fifty per cent of our loan book is corporate — a correction of that will be good for the bank.

As far as unsecured personal loan is concerned, this category was relatively diminutive. It assumed importance after the digitalisation initiative the bank undertook. In August last year, we launched BoB World. Within a year, BoB World has amassed 22 million customers. This gave us access to the entire database, customer transactions, and helped us underwrite good quality unsecured loans.

As we forge ahead, this will comprise a large part of our balance sheet, but the rate of growth will perhaps moderate since the earlier growth rate was on a smaller base.

What kind of credit growth is the bank projecting for FY23?

Compared with 8-9 per cent growth last year, we should see double-digit growth this year. Our estimate was 10-12 per cent growth. The stance for the bank is we will grow in line with the industry or faster and continue to improve our margins.

The total deposit growth of BoB in Q1 was 10.9 per cent, mirroring the industry trend of deposit growth lagging behind credit growth. BoB recently announced a Tiranga Deposit Scheme, offering 6 per cent deposit rate. Do you see deposit rates rise further or have they peaked?

Due to liquidity surplus, rates were negative in real terms. That is not a situation that can or must continue indefinitely. There will be a correction and rates will go up. There is scope for rates to go up as we go along. That is healthy for the economy and the banking system. If the bank wants to attract depositors, giving an inflation-adjusted return will be crucial.

BoB reported healthy profit growth due to lower provision on the back of improvement in asset quality. However, the restructured pool remained elevated at 2.5 per cent of total loans. Is there a concern it could worsen asset quality?

Three figures need to be looked at to understand the issue. One, is the restructured pool. Two, the special mention account book of the bank is down from 2.5 per cent to less than 0.5 per cent. This indicates there is no stress build-up on the balance sheet and we are on the path to recovery.

Three, the net non-performing asset (NPA) figure has come down to 1.5 per cent. This means the existing stock of NPA is very well provided. Slippages and credit cost have shown consistent downtrend.

The upside we have seen in terms of lower provisioning and lower credit cost is likely to continue because there has been a secular improvement in the corporate credit cycle that has happened in the past few quarters.

The micro, small and medium enterprise book has a downside. Given that the corporate book is 50 per cent of loans, credit cost should continue to taper off. That will have a positive impact on the bank’s profitability.

The net interest margin (NIM) contracted quarter-on-quarter to 3.02 per cent, mainly due to higher growth in a low-margin overseas book. What is your guidance on NIM?

The margin impact is as much on account of the fact that in the last quarter of last year there were some recoveries which went to the interest line. Adjusted for that, the margins have been fairly stable. The overseas book, which grew 30 per cent on-year, had some impact on margins. We believe we can get a 10-basis point improvement in margins during the year. Last year due to high liquidity, the spreads on high-rated domestic corporates contracted significantly. It made sense to pursue growth internationally where you got a better spread. As interest rates normalise in India, a larger proportion of growth will come from the domestic market, impacting margins positively.