Amid concerns about a potential slowdown in the personal loans segment, Kumar wants to prop up what’s currently the smallest contributor to the bank’s ‘RAM’ portfolio—industry speak for retail, agriculture, and micro, small, and medium enterprises, or MSMEs.
Kumar’s eventual goal is for Indian Bank’s MSME loans to outpace its retail and agriculture loans. Currently, agriculture loans account for about 25% of Indian Bank’s total domestic loans outstanding of ₹5.2 trillion, followed by retail loans at 21% and MSME advances at 17%.
“My vision is to increase the share of MSME loans from 17% to at least 20% in the next 2-3 years,” Kumar said, explaining that an increased focus on high-yielding MSME loans would aid in improving the lender’s yield on advances supported by some other high-yielding agriculture and corporate loan segments.
“We would particularly like to increase our exposure to MSME loans and have taken various initiatives for this,” said Kumar, a former Punjab National Bank executive director who took charge as managing director and chief executive officer of Indian Bank on 16 January.
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Indian Bank’s yield on advances in the December quarter was 8.92%, higher than 8.77% in the preceding three months and 8.78% a year ago.
Indian Bank’s increased focus on MSME loans coincides with the slowing growth of its agriculture loans—to 13.5% in the December quarter from 16% in the same year-ago period, while the pace of MSME loans improved to 8.2% from 7%, according to the lender’s investor deck.
Growth in the state-run lender’s retail loans improved to 15.8% in October-December from 14% a year earlier. However, within retail loans, growth in personal loans dropped significantly, contracting 14% year-on-year in the December quarter after growing at 30% in the third quarter of FY24 and 35% in Q3 FY23.
According to a recent report by Fitch Ratings, stress in unsecured retail loans, including personal loans and credit cards, contributed around 52% of new bad retail loans in the first half of the ongoing fiscal year (April-September 2024).
Protecting margins versus chasing growth
Much of Kumar’s focus on MSME lending can be attributed also to Indian Bank’s increasingly cautious stance on high-growth retail loans, especially personal and microfinance loans, amid rising delinquencies.
“We are maintaining a very cautious approach for unsecured personal loans,” Kumar said. “So far, we have had a good track record. We are going for customers with a good Cibil (creditworthiness) score or those that have a salary or pension account with us.”
Indian Bank’s personal loan book stood at ₹7,439 crore in December, of which loans worth around ₹6,000 crore were advanced to salaried and pension customers. A year earlier, the bank’s personal loan book stood at ₹8,648 crore.
Indian Bank’s exposure to the microfinance sector is minimal, at around ₹1,106 crore in December, a bulk of which was to a few quality microfinance institutions, Kumar said.
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“Indian Bank consciously slowed down credit growth (as per balance sheet advances) in Q3 to 11% YoY given its longstanding stance of focusing on protecting margins versus chasing growth,” Emkay Global Financial said in post-earnings note after Indian Bank declared its December-quarter results on 29 January.
“Thus, the bank opted to slow down growth in the corporate book, but continues to grow its high-yielding RAM book,” the financial services firm added.
Indian Bank’s net interest margin, a key metric for lenders, improved to 3.45% in the December quarter from 3.39% in the preceding three months and 3.41% in the year-ago third quarter.
The lender’s overall credit growth in the December quarter slowed considerably to 9.7% from about 13% in the previous two financial years. Meanwhile, its share of RAM loans increased to 64.4% of total advances in December from 63.3% in September and 62.6% a year earlier.
Running down personal loans
Kumar said Indian Bank’s focus within the retail segment would be on housing and mortgage loans as vehicle loans were already seeing good growth of 47-48%. The bank’s home and mortgage loans grew 12.1% in the December quarter, similar to a year earlier, while auto loans grew at 47.6%, slightly higher than the 46% growth registered a year ago.
Kumar projected Indian Bank’s overall credit growth in 2024-25 at 11-13% and deposit growth at 8-10%. In FY24, the bank’s loan growth was 13% and deposit growth was 11%, while in FY23, credit growth was 14% and deposit growth was 5%.
Emkay Global observed that Indian Bank continued “to run down its PL (personal loan) book as a part of its risk-management strategy”.
That seems to be working for the bank. Kumar expects to maintain Indian Bank’s credit cost at the current level of about 0.47%. Credit cost is a measure of the quality of a bank’s loan portfolio and factors in the amount a lender expects to lose due to credit risk and includes the costs of provisions, write-offs, collection expenses, and loan restructuring.
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Improving asset quality
Indian Bank’s limited exposure to high-stress segments such as personal loans and microfinance has helped it maintain a ‘pristine’ asset quality with nil special mention accounts, or SMAs, in its microfinance portfolio. SMAs are loan accounts where payments have been delayed by a specified number of days past the due date.
Several of Indian Bank’s peers face increased instances of loan defaults due to stress in the microfinance, agriculture and personal loans segments.
“Indian Bank has a very robust system of credit underwriting,” Kumar said, explaining that the lender has gone beyond the Reserve Bank of India’s classification of SMA accounts. Loans are typically classified as NPAs, or non-performing assets, after they breach the SMA bucket, becoming overdue for more than 90 days.
The central bank classifies SMA 0 as loan accounts where payments have been delayed by 30 days past the due date, SMA 1 as 30-60 days and SMA 2 as 60-90 days. Indian Bank has bifurcated SMA 0 into SMA 0A and SMA 0B for loan accounts where payments have been delayed by 0-15 days and 15-30 days, respectively.
Indian Bank’s net NPA ratio improved to 0.21% in December from 0.27% in the September quarter and 0.53% a year earlier.
