Federal Bank Bets Big On MSME Growth To Offset Margin Pressure
The private sector bank plans to grow its MSME loan book by 18-19% year-on-year in the current financial year
Federal Bank is sharpening its focus on extending loans to micro, small, and medium enterprises to counter the margin squeeze due to rapid interest rate cuts, two people close to the development told NDTV Profit.
The private sector bank plans to grow its MSME loan book by 18-19% year-on-year in the current financial year, an official close to the development said. For the quarter ended March, the bank's total loan book was at Rs 2.42 lakh crore.
Commercial banking makes up 11% of the south-based lender's total gross advances mix, with retail at 56% and corporate at 33%.
Nearly 90% of the bank's business banking segment has exposure to MSMEs, followed by 70-80% of the commercial book and 15-20% of the corporate book, which consists of MSME borrowers, the official said.
An email sent to Federal Bank on the matter did not yield any response at the time of filing this story.
While Federal Bank remains cautious on infrastructure and related sectors, it is bullish on auto, auto ancillary, textiles and railway-related sectors in the MSME segment.
For the quarter ended March, Federal Bank's net interest margin was at 3.12%, and the bank has guided for NIMs at 3.52% in the next three years, according to February's analyst presentation.
"There is good scope in terms of growth and industry as a whole in the MSME segment led by government support through various schemes, and historically, we haven't seen any hiccups or negative surprises in this space," Bunty Chawla, Assistant Vice President of BFSI at IDBI Capital Markets & Securities Limited, said.
There is good diversification, as MSMEs are not in a single portfolio business, Chawla said, adding that they are in services, wholesale and retail, making it a good combination and leading large private sector banks to focus on this segment.
However, RBI's sectoral deployment data shows credit to industry (MSME) has witnessed a de-growth of 1.1% on year in April as against the 0.1% growth recorded in the same period a year ago.
The commercial credit portfolio of the MSME sector grew 13% on-year as the overall credit exposure increased to Rs 35.2 lakh crore as of March 31, led by an increase in credit to existing borrowers, according to TransUnion CIBIL and SIDBI's MSME Pulse Report for May.
The MSME sector includes borrowers with credit exposures up to Rs 50 crore.
While demand for commercial credit--measured by the number of enquiries--rose 11% YoY in the March quarter and commercial credit supply by value grew 3% YoY in FY25, the last quarter saw a decline of 11% YoY, possibly due to higher credit concerns arising from increased external headwinds.
Despite this slowdown in origination, credit extended through new cash credit facilities remained resilient with 7% YoY growth in Jan-Mar, the report said.
This move of focusing more on the MSME loan book is part of the bank’s medium-term strategy as it shifts towards the mid-yielding category from high-yielding amid a slowdown in the retail and corporate credit segments.
After the RBI increased risk weights on consumer credit in November 2023, most banks have cut back on growing their retail loan book, which are typically considered high-yielding.
However, MSME lending typically commands higher yields than large corporate loans, which will support the bank's NIMs even as deposit costs rise.
By 2027-28, the bank aims to reshape its advance mix by increasing its mid-yielding book to 34% from 31% in FY25, its high-yielding book to 5% from 3% and its very high-yielding to 3% from 2%, according to the analyst presentation. It aims to slow down its low-yielding advance book growth to 58% from 64% in FY25.
According to the senior official quoted above, Federal Bank's microfinance institution book is likely to bottom out by the end of the September quarter, with a potential turnaround in the December quarter depending on the first half of the current financial year.
The personal loan book of the bank has also likely bottomed out, with expectations that this segment will see de-growth or marginal growth in FY25. In line with MFI, this book is also likely to see a turnaround from the December quarter.
As of March 31, the bank's MFI book was 3% of its retail book, totalling Rs 4,110 crore, while personal loans and credit cards were at Rs 3,789 crore and Rs 3,550 crore, respectively. The retail loan book stood at Rs 79,774 crore.
