Karur Vysya Bank May Not Meet FY17 Loan Growth Target Due To Note Ban

A vendor holds an Indian twenty-rupee banknote while selling artificial garlands (Photographer: Dhiraj Singh/Bloomberg)

Mid-sized lender Karur Vysya Bank is unlikely to meet the 12 percent loan growth target it had set for financial year 2016-17 due to the impact of demonetisation.

Drought conditions led to slower growth in the bank's agricultural loan book even as demand in the corporate segment is yet to pick up, Managing Director and Chief Executive Officer K Venkataraman told BloombergQuint in an interview. Agriculture and corporate banking contribute 17 percent and 34 percent, respectively, to the bank's total loan book. He does not expect any significant jump in bad loans once the Reserve Bank of India's 90-day window relaxing rules for classifying such loans closes.

Here are edited excerpts from the conversation...

What has been the trajectory of credit and deposit growth since January?

We may see a pick-up in growth only from the third quarter of the financial year 2017-18. The pick-up in the agriculture segment has been slow, especially in geographies which are reeling under drought, as farmers have refrained from planting a second crop. In the commercial banking book, we don't see problems with those businesses that are directly linked to consumer demand. NPAs or slippages are unlikely to jump to extraordinarily high levels.

Will you meet your loan book guidance for FY17?

Meeting the 12 percent loan growth guidance for FY17 may not be possible due to the impact of demonetisation. We were on track till October but are now unlikely to grow at the same rate up to March, especially since the corporate segment has not picked up.

After demonetisation, the Reserve Bank of India had allowed a three-month window to not consider unpaid loans of up to Rs 1 crore as bad loans. What could your NPA numbers look in the April-June quarter after this window closes?

Between February and March, most businesses returned to normalcy. I do not think there will be any big impact in the April-June quarter.

Karur Vysya Bank had seen a strong 53 percent growth in current and savings account (CASA) in the December-ended quarter. How has that changed since then?

We will be able to retain a substantial portion of the CASA balance which has increased after demonetisation. We have doubled the number of accounts opened on a monthly basis. The months of November and December were an exception. The share of CASA deposits should be higher than in the past.

Why have the Strategic Debt Restructuring scheme (SDR) and the 5/25 refinancing scheme not been successful?

The Reserve Bank of India (RBI) has given a framework. Its success or failure depends on banks. I think a lot has to do with borrower reluctance. These schemes per se may not be really workable because they are based on significant changes like bringing in a new management or new investors. The present market condition is also not conducive to run these schemes.No investor is keen to take over any account even if the affected company's manufacturing facilities or sector is strong because demand is low.

Is consolidation the need of the hour right now?

Merger of financial institutions is difficult unless there is natural compatibility between banks. For PSU banks, it is better to not have forced mergers. The need of the hour is to strengthen and clean up bank balance sheets. Bad loan resolution is more important. Mergers will not solve this problem and will only aggravate the issue.

For private banks, especially smaller banks like us with stronger balance sheets, the need for a merger is simply not there. We prefer to grow organically. Right now, banks are focusing on getting back to business-as-usual rather than actively pursuing M&A.

Would you consider any M&A possibility that may come your way?

We are not really looking at the inorganic route for growth. Traditional old-generation private banks have their own business models. We find our model strong enough to handle SME and retail accounts better. So changing the business model for a merger does not make sense.Within smaller private banks also, the business models differ. While we are ambitious with respect to growth, we do not have higher risk appetite due to the size of our balance sheet. Aggressive growth can lead to accumulation of risk. Besides, the business model does not permit rapid growth as is the case with bigger banks.Our growth rates are not as high due to lower share of the wholesale portfolio.

Have you received any buyout interest?

Nobody has approached us. We would not like to be acquired because we want to retain our identity and grow organically. If we get a good buyout offer, we can always consider that.

If India's largest private bank approaches your bank, will the board consider it?

We will not. Irrespective of the bank that approaches us, Karur Vysya Bank would like to retain its original identity.

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