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Business News/ Market / Stock-market-news/  Federal Bank to fund SMEs to overcome rising NPAs
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Federal Bank to fund SMEs to overcome rising NPAs

Federal Bank is banking on SMEs to help it tide over rising NPAs and timid loan demand from the corporate sector

Federal Bank’s first-quarter net profit dropped 36% to `141 crore. Photo: Pradeep Gaur/MintPremium
Federal Bank’s first-quarter net profit dropped 36% to `141 crore. Photo: Pradeep Gaur/Mint

Mumbai: Kerala-based Federal Bank Ltd is banking on individuals and small and medium enterprises (SMEs) to help it tide over rising non-performing assets (NPAs) and timid loan demand from the corporate sector, managing director and chief executive officer Shyam Srinivasan said in a interview on Wednesday.

“Corporate loans are really a function of demand and larger companies are moving away from bank credit and going into the commercial paper and bond market which we cannot compete with because it is 1-1.5% cheaper," he said. “We would like to grow our corporate book at 19% at least, like last year, but for that to happen the second half of the year and the last quarter in particular is crucial."

Federal Bank’s first-quarter net profit dropped 36% to 141 crore as the bank set aside 117 crore as provision for NPAs. This was more than double the 54 crore it had provided last year and also three times higher than the 28 crore it had set aside in the quarter ended March.

The bank also had to provide 49 crore to make up for unfavourable movements in its government bond portfolio.

Srinivasan called the last quarter a double whammy because a large loan of 134 crore to a metals company turned bad. “But we had always guided for this so it was not a bolt from the blue," he said, adding that he sees an increase in NPAs in one quarter as a “business cost".

The higher NPAs pushed up gross NPAs to 2.59% of the total loan book from 2.20% last year, hence the higher provisioning.

In a report after it announced its results last month, Vaibhav Agrawal and Umesh Matkar, analysts with Angel Broking Ltd, said Federal Bank’s earnings were affected due to slower loan growth, higher cost-income ratio and poor asset quality.

Loan growth was at 10% year-on-year but the book shrunk 3.4% versus the quarter ended March 2015. Corporate loan book growth at 2.7% was much slower than the 17% and 16% growth recorded by the bank’s agriculture and SME books.

“Given the weak economic environment, we remain watchful of the bank’s near-term performance on the asset quality front," Angel Broking said in the report dated 22 July.

Srinivasan did not comment on the bank’s future NPA risks. However, while speaking to PTI on 5 August, Federal Bank’s executive director Ashutosh Khajuria said the bank faces the prospect of two more accounts totalling 200 crore turning bad.

Srinivasan said unlike previous years, this time it will be the SME and retail segments which will be the growth engines for the bank.

“We expect both these segments to grow at 20% this year. But we are still hopeful that we will see demand from companies as well this year. Right now credit demand from companies is coming from existing clients for working capital and existing line utilisation," he said, adding that credit proposals continue to remain thin but he remains optimistic that demand will pick up in the next 3-6 months.

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Published: 13 Aug 2015, 06:41 PM IST
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