RBL's growth story: similar to some other banks: suggestions to regulator

 

RBL Bank’s Growth and Financials : Some Thoughts

RBL Bank is among the few private sector banks in India that grew their balance sheet substantially in the last five years. Post IPO 2016, the bank’s presentation included a ‘vision 2020’ statement, as per which goals were fixed for each FY up to Mar 2020 for achieving

o   CAGR (compound annual growth rate) of 30-35% under loans and

o   non-interest income to contribute at least one third of net total income

The achievements for the respective quarters/years in relation to the set goals was made part of the bank’s presentation to the investors.

 Growth Story: To the credit of the bank, it achieved a CAGR of 29% in the period FY 2016- 2020 under advances (CAGR of 37% for the period FY 2016-FY 2019 and a y-o-y growth of 7% for FY 2020 over FY 2019). It also surpassed the non-interest income by achieving a CAGR of 36% in the above period. As can be seen from the table below, deposit and advances had grown by more than 140% over the 4 year period and the net profit grew by nearly 200%

(Rs. in Cr.)

Head	2015-16	2016-17	2017-18	2018-19	Increase in 2018-19 over 2015-16 (%)
Deposits	24,349	34,588	43,902	58,394	140
Advances	21,229	29,449	40,268	54,308	156
Total Business	45,578	64,037	84,168	112,702	147
Investments	14,436	13,482,	15,448	16,840	17
Total Net Income	1310	1977	2834	3982	204
Non-Interest	491	755	1068	1442	194
Net Profit*	292	446	635	867	197

*(Due to retained earnings and monies raised through equity, the net worth also went up from Rs.2, 960 cr. in Mar 2016 to Rs.7,336 cr. in Mar 2019)

 Hit a Road Block: However, the bank hit a road block in the second quarter of FY 2018-19, when its net profit declined by 277% y-o-y (Rs.54 cr. in Sep 19 quarter  versus Rs.204 cr. in Sep 2018 quarter) and by 394% over the previous quarter (Rs.267 cr. was the profit in June 2019). The bank informed that the stress in the economy and deterioration in the credit environment outside had an impact on its quality of assets and that app. Rs.1800 cr. loans were identified as stressed assets. Though the operating profit for Sep 2019 was higher than that of Sep 2018, increased provisions at Rs.533 cr. in Sep 2019 quarter (Rs.140 cr in the corresponding period previous year) resulted in the steep decline in Net Profit. 

Trend Reversed?: After four quarters of dip in the net profit, when compared with the corresponding periods of the previous year, the bank reported an increase of 165% in the net profit (Rs.144 cr.) for the quarter ended Sep 2020 vis-à-vis the results posted in Sep 2019.  The turnaround was made possible due to the following reasons.

(i)            The credit portfolio, which was earlier tilted towards wholesale banking,  is now dominated by exposure to non-whole sale banking

(Loans to Non-Wholesale Banking: Wholesale banking is now at 57:43 as against 45:55 a year ago)

(ii)           The addition to NPAs during the Sep 2020 quarter was Rs.145 cr. while the additions were Rs.1377 cr. in Sep 2019.

(iii)          The bank was able to reduce the interest expenses by Rs.110 cr., while retaining the total income at the same level

(iv)         The base figure for comparison was the net profit achieved in Sep 19, which was lower at Rs.54 cr.

'High Risk' Concerns: Whether the success story will continue in future, depends on several factors like the impact of COVID on credit growth, delinquencies in credit portfolio, etc.  Though the focus is now more on retail banking, there are ‘high risk’ concerns if one goes through the financials of the Bank.

a.    The bank’s stupendous growth under interest income and other income are due to the more than exceptional growth achieved in the following non-wholesale banking sub-segments

Loans outstanding (Rs. in cr.)

Head	Mar 2018	Mar 2019	Mar 2020	Sep 2020
Credit Cards	2244	5283	10509	11286
Micro Finance	3560	5028	6445	6686
LAP	4161	6453	7591	7979
Total of sub-segments	9965	16764	24545	25951
% of sub-segments above  to non-whole sale banking	62	70	75	81

The above three portfolios account for 46% of total advances as on Sep 30, 2020. Though every bank has given a positive picture so far on their exposure to credit cards, micro finance and loans against property, they remain the most vulnerable areas in the post COVID scenario.

b.    Credit Card Outstanding at Rs.11,286 cr. accounts for 20% of gross advances. Nearly, 80% of the above are in the nature of revolving/term repayment facility. Out of the total non-interest income of Rs.456 cr. in Sep 2019, Rs.202 cr. came from credit cards. The increased dependence on credit cards for interest and non-interest income exposes the income of the bank to concentration risk to a particular credit portfolio.

c.    As on 31st March 2020, 41%  of its total advances were unsecured (5% in whole sale and 36% in non-wholesale)

d.    The bank said in the press release “Net Interest Income is sequentially down due to proactive reversal of interest income on Non-Wholesale Advances expected to slip by Q3 FY21”. (Emphasis mine)

 Purpose of this article: Like RBL Bank, few more private banks and majority of small finance banks had shown a CAGR of more than 30% under advances in the last three years. Though the level of concentration is different for each bank, invariably all the banks have increased their exposure substantially under one or all of the high risk accompanied by high yielding personal unsecured, credit cards and microfinance sectors. Of course, as on date, as per the unaudited financials announced by the banks, including RBL Bank, nothing has come to notice of any impending financial crisis. A clear picture may emerge only by the end of FY 2021. However, it will be worthwhile to consider a scenario, if the diversified but high risk credit portfolio goes in to a stress.  It will also be appropriate to think about strengthening risk mitigants and supervision measures to prevent systemic risk arising from few players showing exorbitant credit growth, when the average growth is moderate. I have a few suggestions.

 1.    Regulator:

(i)         Banks were asked to build Capital Conservation Buffer (CCB) and the mandate is 1.875% over and above the CAR requirements of 9.0%. Counter Cyclical Capital Buffer (CCCB), which requires the banks to build up buffers during good times, is yet to be introduced by RBI, as the Credit to GDP is still negative. Each bank is required to have the same CCB, irrespective the credit growth achieved in a particular year/period and no distinction is made between banks showing exceptional credit growth and the other banks which are in line or below the average credit growth of the industry. This should be corrected. To start with, banks achieving more than 25% credit growth/ 10% more than industry average, for more than two consecutive years, or where the exposure to the unsecured segment is higher than 25%, shall be mandated to keep a CCB of 50 basis points over and above that is stipulated for the banking industry.  It serves as a cushion during times of stress and more importantly conveys to the stake holders that the bank’s credit growth is much higher than the industry average. 

(ii)        Periodicity of on-site inspection can be shorter and additional off-site monitoring reports can be introduced for banks achieving exceptional credit growth for two consecutive financial years. 

 

2.    Rating Agencies:

(i)            While rating the banks for their debt instruments/CD programme, credit rating agencies do point out the weaknesses and also highlight the key sensitivities that might call for review of the ratings. The rating continues normally for one year. Where the credit growth is more than the normal or when the concentration on the unsecured is on the increase, the credit rating agencies shall get a mandate to review their ratings half yearly.

(ii)           While growth in revenues and business form the backbone of higher ratings, the rating agencies should work out a methodology for indicating the future uncertain risks due to higher business growth. It may issue two ratings, one based on the present financial position and the other - a contingent rating, if the future uncertainties materialise. In the alternative, if the growth carries uncertain future risks which are not visible today, it can award the rating based on the present performance and indicate the outlook taking into account the uncertainties.

3.    DICGC Cover for deposits: Whenever a bank is under stress, there is an outflow of deposits as the monies deposited are unsecured. To mitigate the problems faced by the depositors, DICGC Insurance has been enhanced to Rs.5 lacs (from Rs.1 lac) for all the banks. The premium to be paid is the same to all the banks. Banks with higher credit growth or having higher exposure in enhanced credit risk sectors, shall be asked to pay more premiums.  For this purpose, risk based premium based on the ratings assigned for deposits (rating is now available only for CDs. It should be introduced for all deposits including retail deposits). Publishing of ratings for accepting retail deposits and the premium structure for different banks based on their ratings shall be displayed in the banks' websites/advertisements and in all their branches. This will enable a depositor to take an informed decision, when he place his deposit in a bank. This will also promote risk based pricing for deposits.

 

V.Viswanathan

 

2^nd November 2020