As India grows richer, banks will have to adjust to thinner margins: Indian Bank CEO

‘s MD & CEO, Binod Kumar, believes that interest rates have bottomed out and that retail deposit rates are likely to rise if credit demand stays strong. He tells Sangita Mehta the 3% net interest margins enjoyed by are a luxury that may not last. Net interest margins (NIM) would be further crimped as India moves toward becoming a developed economy, he says. Kumar also outlines the lender’s capital-raising plans ahead of (ECL) norms, while explaining the rationale behind entering the wealth management business. Edited excerpts:

ET reported early this month that several domestic banks including Indian Bank plan to enter the wealth management business. What is the rationale?

I am planning to set up a separate wealth management vertical, possibly in the second half. Looking ahead 10 years, the banking landscape will be very different. Do you think this level of NIM (net interest margin) will continue? No. It will never continue. The 3% margin is a luxury. NIMs will come down to below 2.5% if India becomes a developed economy. At that point, banks will need alternative income streams. We already have a strong and growing HNI customer base, which makes wealth management a natural extension.

Also Read:

One key difference between PSU and private banks is that PSU banks tend to focus on total business, while private banks focus on revenue. How do you see this distinction?

I am also focused on revenue. Focusing only on total business can be risky. If you lend to AAA-borrowers at 6%, total business goes up easily. Riding a horse is easy, but coming back is very difficult. Sanctioning a ₹5,000 crore loan at 7.25% to an AAA borrower is easy-anyone will take it. But what happens next year? It impacts margins. Borrowers remember that pricing and may ask for 7% next year. It is very difficult to exit that cycle. Once banks reach a total business of ₹20 lakh crore, they have to grow beyond that level. Fortunately, we are not pursuing aggressive growth at the cost of margins.

What is your outlook on interest rates?

On rates, my assumption is there will be neither a rate cut nor a rate hike. I don’t expect a rate cut since inflation is going up. I also do not expect a rate hike because India’s USP (unique selling point) is its growth rate, so unless inflation spikes, I expect that they will refrain from raising interest rates. If loan and deposit growth continue, then bulk deposit rates may go up. Some hardening in bulk deposit rates has already occurred in the first quarter. Secondly, if credit growth continues to outpace deposit growth, banks will have to raise retail deposit rates. Therefore, MCLR has bottomed and retail deposit rates can go up from here.

You had mentioned plans to raise capital to mitigate the impact of higher provisioning under Expected Credit Loss norms. Can you elaborate?

We do not require growth capital. We are raising capital purely for ECL implementation. The impact of ECL is expected to be around ₹4,000-6,000 crore, which can be absorbed comfortably. We still have one year to implement ECL norms. Initially, we plan to raise ₹2,500 crore with a greenshoe option of another ₹2,500 crore. If the entire ₹5,000 crore is raised, the government’s holding will fall from 73.84% to about 70.9%.

Do you think banks should be given more time to meet ECL guidelines?

No. If ECL had been implemented suddenly, it would have been challenging. But ECL has been discussed for the past three to four years. Banks are mentally prepared and have been building cushions wherever possible. Asset quality has been benign over the past five years, so the ECL impact will not be severe.

Nearly two-thirds of your corporate loan book is to A-rated and above borrowers, which tends to compress margins. How do you view this trade-off?

Nearly 73% of our corporate loan book is rated AAA or AA. The real sweet spot is between A and BBB, which accounts for about 27%. A-rated borrowers provide better yields, whereas AAA and AA borrowers offer very thin margins. There are also cases where AA-rated companies behave like AAA borrowers on pricing.

What is your outlook on home loans, especially with PE-backed housing finance companies being aggressive in this space?

We have seen 14% growth in home loans, which now account for about 15% of our total loan book. Housing finance companies have largely cornered the affordable housing segment, particularly non-salary customers, which typically do not come to banks. Home loans remain the most secured segment. Margins may be lower, but risk is diversified. Our home loan portfolio is expected to grow to around ₹95,000 crore from about ₹84,000 crore currently.

Also Read: Stock Radar:

Deposit growth has been challenging across the system. What are the options you are exploring?

We are also exploring bond issuances. We have issued infra bonds. Bonds provide long-term funds, but the yields are fixed, so we do not benefit from interest-rate cycles. While there are advantages in terms of SLR and CRR, the rate-cycle benefit is absent. One alternative is portfolio churn-selling priority-sector loans to raise resources. But that works only if your credit growth exceeds your target. If you desire 13% growth but are actually growing at 15%, you have surplus to sell. That is what we did last year.

How do you overcome the challenge of retaining a 40% share of low-cost deposits?

Customers are increasingly behaving like investors rather than savers and do not want to keep money idle in banks. Our focus is on two areas. One is salary accounts, which offer good cross-selling opportunities; we are targeting new entrants as shifting existing salary accounts is difficult due to multiple linkages. The second is float income-through collection accounts to capture transactions at the source, ensuring a one-to-three-day float, and by strengthening cash management services (CMS) to sustain CASA balances..

What are your loan growth targets across segments?

We expect credit growth of around 11-13% for FY27. When I took charge last year, retail loans accounted for 21% of the book. My target is to take this to 25%, and we have already reached 23%. Similarly, MSME loans were at 16% when I joined. My target is at least 20%, and we are currently at 18%. Digital transactions were at 92% earlier. My aim is to improve this further, and we have already made significant progress.

Do you expect demand from customers for the (ECLGS) announced recently by the government?

The ECLGS has worked very well. It helped companies tide over difficult times, and guarantee claims were minimal. The exchequer did not suffer significant losses. If support had been extended as direct benefits to borrowers, the outcome might have been very different. We have instructed our teams to proactively identify eligible accounts and approach borrowers instead of waiting for requests.

There is a lot of discussion around consolidation in the banking sector. Do you see a need for further consolidation?

If India aspires to become a developed country-and I strongly believe it will-then we need some Indian banks to feature among the global top 100, top 30, or even top 20. Organic growth alone will take only a few banks to that level. If we want a larger number of Indian banks to reach global size, consolidation can help through the inorganic route. If, say, five Indian banks figure among the top 100 globally, that would be a good outcome. India is well positioned to reach that scale of GDP, and consolidation can support that journey.