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00:00Innocent Bank's quarter was much like some of the other companies that came out with
00:11numbers in that there were some positives and some negatives, not had many negatives
00:15to be very honest because while margins came off a little bit because of growth moderation
00:20which is intended, the management is comfortable on margins, they remain comfortable, there
00:25is good growth anticipated in FY25 with rural and agri expected to improve but there is
00:30so much more to talk about to Mr. Sumant Katpallya, he is MD and CEO of Innocent Bank, joins us
00:35right now to talk about all of this.
00:36Mr. Katpallya, good having you, thanks for taking the time out.
00:39My name is Neeraj and at the outset I would love to understand whether you believe the
00:45last quarter gone by which is quarter 4 and maybe the last few quarters wherein in some
00:51sense there have been a lot of moving parts would be slightly different than what the
00:55next four quarters might hold in store for the banking space at large and for Innocent
01:01in particular.
01:06So thank you Neeraj and thank you for inviting me to the show.
01:10Like you rightly pointed out, I think there are always some moving parts, you can never
01:15have a steady quarter.
01:16I continue to believe that we have been very steady on our net interest margin which is
01:22a reflection of how your business is moving and I think our net interest margins have
01:26been range bound between 4.25 to 4.3 and if you look at last six quarters that's where
01:32we have been.
01:33I think our ROAs has also been very range bound which is 1.9 to 1.93 and that's a reflection
01:40of our return on assets have been.
01:42I think we've always said that gross flows is not an indication in our business because
01:48we run businesses which have cyclicality in it and businesses like vehicle finance or
01:56businesses like microfinance, they do get impacted with any geopolitical issues or natural
02:05disasters or calamities and I think we've always said our credit cost have been in range
02:11bound between 110 to 130 and we've been able to maintain that.
02:15So I think we are very consistent and very range bound.
02:19I continue to believe with the country growing at 7% GDP or 7.5% GDP, I continue to believe
02:28that the growth will continue to come.
02:31I think the growth will come in the retail and also in the MSME and the SME segment mid-time.
02:38We have to wait and watch when the private CAPEX cycle moves up and I think that's something
02:44which we are all waiting but there is enough demand in the market to have a growth of 14
02:48to 16%, a system growth of 14 to 16% at any point of time.
02:54You did about 18% credit growth as well which some people classify as moderate considering
02:59what you've done in the past.
03:01Would love to understand what facets would you believe lead to this growth because if
03:06I look at quarter 4 alone, I think vehicle finance, maybe mortgages as well as buckets
03:13did reasonably well but I heard you say in the opening statement that some of the spaces,
03:18particularly vehicle finance and maybe MFI might have impacts if there is global volatility.
03:24It seems that we might maybe have that even if the Indian domestic growth looks stable.
03:31What would you classify as the strong suits to your mind for the next 12 months?
03:39So I continue to believe that our growth, we've given a guidance of growth of 18% to
03:4522% and we always remain in that range on our businesses.
03:50Our retail businesses which are vehicle finance, JLG continue to grow, microfinance continue
03:58to grow at upwards of 18% to 25% depending on which business you talk about.
04:03The reason why we are so confident about the growth is because we've diversified these
04:07portfolios.
04:08So vehicle finance is now not a commercial vehicle business, it also has personal mobility
04:14and a large part of the book has come from personal mobility when the commercial vehicle
04:19slowed down.
04:20So we have a diversified portfolio in commercial vehicle, eight categories of vehicle financing
04:25which we do and I think that's the reason why we've been able to sustain that growth.
04:29In microfinance also, which is the rural, I believe the rural sector will continue to
04:33do well with the good monsoons projected this year.
04:38If that happens and it's true, I think we also diversified the business into merchant
04:42acquiring business which is now 13% of the microfinance book and I think the JLG business
04:48continues to grow at 20-22% while the merchant acquiring business grows at 30-35% which
04:55is giving an overall growth of 25-28%.
04:58So very comfortable with these businesses, the credit costs have been range bound and
05:01our yields have been range bound in these businesses.
05:05Your headline asset quality certainly stabilised, there was some point that you were making
05:08about MFI portfolio, there was some stress if I'm not wrong in quarter 4 in the MFI side
05:13particularly in the northern region which is probably similar to most of your peers
05:18as well.
05:19But I'm just trying to understand, is that a one quarter or a two quarter phenomenon,
05:23is it predictable that it will improve over the course of the next 12 months because it's
05:27sounding sanguine about the MFI side of the business?
05:31See, MFI is a business which is cyclical in nature, it will continue to have these type
05:40of disruptions which will happen.
05:42As long as you keep a contingent buffer which is 2% of the JLG book in the microfinance,
05:48you're comfortable.
05:50So you must continue to keep the contingent buffer to manage the counter cyclical issues
05:55which may arise after the microfinance.
05:58We also follow a very textbook approach in the microfinance in the JLG business.
06:03We have absolute concentration risk which we've defined by district and by state as
06:09to what we will take as exposures.
06:11We've been able to define these exposures very well and contain our book within those
06:17exposures.
06:18So, for example, we saw the writing on the wall in a particular state in northern India
06:24long time back, six months ago, and we started reducing our exposures very strongly in that
06:29business.
06:30So if you look at the exposure which we have in one of the states which has got impacted
06:34was about 300 crores.
06:36So we were able to manage that exposure and we had taken enough provisions, counter cyclical
06:41provisions in our book to take care of any eventuality.
06:44Now, microfinance businesses, if you look at the credit cost, has been range bound between
06:48two and a half to three percent, and that's what we've been given guidance, that microfinance
06:53as a business, the JLG part of the business, will continue to run at two and a half to
06:58three percent credit cost.
07:00Okay.
07:01Now, coming to deposits, I believe you've spoken about the possibility on the call,
07:08please correct me if I'm wrong, of higher cost of deposits coming into play in FY25.
07:15When does the cost of deposit stop and could the pace of deposit growth, which has been
07:25slower than advances, change over time in the next three or four quarters?
07:35So I think there are two questions which you've asked.
07:38One is the rising COD and when does it stop or what is the ceiling on that?
07:45I think the second question is, what is the pace of growth of the deposits?
07:50So let me take the first one first, and I think as long as there is a difference between
07:57the term deposit rate and the savings account rate, I think the cost of deposits will continue
08:04to rise for the banking sector because deposits are moving towards term deposits.
08:09It's not that the banking system has no liquidity, I think it's the cost of liquidity which has
08:15risen in the banking system and that's the reason why this is happening.
08:20In my opinion, I think the cost of deposit, we have to wait for the policy rate moderation
08:26as and when it happens.
08:29All of us were assuming a policy rate moderation in the second quarter, third quarter or the
08:33fourth quarter.
08:34We have to wait and watch what is the stance on inflation and the geopolitical situation
08:39which happens when the policy rates come down.
08:42And till that happens, I think you will see a heightened cost of deposit and it will continue
08:48to be for a couple of quarters.
08:50In spite of that, we've seen 160 to 175 basis points cost of deposit increase, but we've
08:57been able to manage our NIM, our margins range amount during this time and our margins
09:01have been 4.28 to 4.29 during this time because our mix, our ability to change the mix has
09:07been very high and we've been able to manage that because our retail businesses come at
09:12a yield which is 500 to 600 basis point higher than the corporate yield and our mix has moved
09:17towards retail.
09:18Now, how will the liability move from here and what are they?
09:22See every bank will have to have a differentiated strategy and every bank will have a very differentiated
09:29approach towards it.
09:30We can't follow the large banks and say that we will follow the mass or anything.
09:35You have to follow a very differentiated.
09:37We believe that segmented approach in distribution, whether it's geography or in clients will
09:44create a very differentiated product proposition.
09:47So we focused on NRI and Affluent and we got our deposits from there.
09:51So we are now at 3.71% on the NRI base and we believe that we will cross 5% in the next
09:57two years.
09:58So we believe that that's a very stable and a very good deposits to get.
10:02The second base which we believe is the Affluent segment and our pioneer proposition has done
10:08very well.
10:09We have a 70,000, 82,000 crores of NRV with 60% of that coming in liabilities and we've
10:16been able to manage the liability growth from that and of course our branch expansion continues
10:20to work very well.
10:23On the geography side, we played the home market strategy where we have a 3.5% market
10:28share against a 1.9% overall market share in liabilities.
10:33These are markets which are closer to the metros in tier two and tier three locations
10:38where we've captured the market share and we are now going to expand these home markets
10:42and get into micro markets as a consequence of the home markets and we believe that we
10:47should be able to mobilize deposits.
10:49The last thing I think which we are doing and two, I think we are going to launch community
10:53banking.
10:54We believe communities in India play a very, they're not caste-based community but they
10:58are communities which we believe we have a strong hold on and we can make a huge differentiation.
11:04So we will play the ecosystem play in communities and get those deposits going.
11:08And of course we've launched our digital proposition which is the Indy and I think we've got 1.2
11:15million accounts.
11:16We will see balances grow month on month on this.
11:18We've launched only six months ago.
11:20We will acquire 10 million customers in the next three years and that will become a very
11:24sizable balance sheet as we move along.
11:28Okay.
11:29A couple of macro questions, Mr. Katpalia, before I wrap up this.
11:34You've said that you want to invest in your digital infrastructure.
11:38You very nicely explained how you are taking a slightly differentiated approach opposed
11:42to what larger banks are saying.
11:45Post-COVID and naturally so, for a period of two years, the focus was completely away
11:50from branch expansion and it was entirely on how you attract customers via the digital
11:55route.
11:56There seems to be a small change in the last 12 months wherein we speak to some of the
12:01private sector banks who are focusing quite strongly on physical branch expansion as well.
12:08Has something changed in the landscape or the customer approach?
12:12And I know it will largely be digital, but I'm just saying more emphasis one versus the
12:17other.
12:18Has something changed in the landscape or are different banks charting their own course
12:21and some will be happy with just a larger focus on digital as opposed to physical branches?
12:29I think like you rightly said, Neeraj, both have to coexist.
12:34I continue to believe that relationships belong to branches and transactions belong to digital.
12:43And the convenience is a very important factor, but the comfort and the trust factor comes
12:47from physical branches.
12:49Like you rightly said, I think a lot of banks did not grow their branch network during COVID.
12:54We continue to expand our branch network during COVID because we were smaller in size at that
12:59point.
13:00We are today at 2,987 branches.
13:01We work in planning cycles, which is in the first, we are in the planning cycle six.
13:06We are in the first year of planning cycle six and we want to go to 3,500 branches.
13:11We lack 600 more physical branches in the next two years.
13:15We continue to believe that branches are a very important component of liability strategy
13:21and specifically in the affluent segment to get the trust as well as to get the comfort
13:27and the relationship approach going.
13:29So we continue to believe that we will continue to invest on physical assets as well as digital
13:35assets as we move forward.
13:37Mr. Kachpalya, my final question is related to a point that you made at the start of this
13:42conversation wherein you mentioned that we are waiting to see private CAPEX pickup.
13:49Would a pickup in private CAPEX translate into equal and opportune growth for bank credit
13:56or would this time around be slightly different than a previous cycle of 2003 to 2008 because
14:04the private entrepreneur might not necessarily go to the banking channel for all the funding
14:08needs that are alternative means available?
14:11See, it will always happen like that.
14:16There will be alternative needs, capital options which will be available to the private entrepreneur
14:23or the private sector.
14:24But I continuously believe that the projects may be converted into alternate need but the
14:30working capital will still continue to come from the banking channels in a big way and
14:35I think some parts of private CAPEX will also come towards the banking channels.
14:39So always it's a healthy sign to have different forms of capital raising as well as to fund
14:45your projects as well as fund your working capital needs.
14:48So I think while 100% was coming initially, it will move to about 45 to 50% but still
14:56the credit growth will see a growth because of the private CAPEX and it's good for the
15:04country to have a private CAPEX coming into play.
15:07Most certainly.
15:08Mr. Gatpalia, lovely talking to you.
15:09Thanks so much for taking the time out and being with us and look forward to have you
15:12more often on the channel and our platforms.
15:19Thank you so much Neeraj and I look forward to interactions with you much more.
15:23Thank you so much and viewers, thanks for tuning in to this very special conversation.