In conversation with Venkatraman Venkateswaran, Group President and CFO, Federal Bank

"Our Credit Quality Remains Strong" 

What is your outlook on the Indian banking sector? In your view, which key drivers will boost sustainable credit growth in India over the next 3-5 years? 
 

The banking sector is witnessing higher credit momentum driven by sustained retail and rising corporate loan growth. The rise is expected to continue for the near term. Rising inflation in crude, commodities and other inputs has increased working capital requirements, particularly for small businesses, leading to increased demand for credit. Since the interest rates for market instruments has increased steeply, corporates, which were depending on such instruments, are looking at banks for credit facility. We have seen uptick in demand for bank credit. In the short term, credit growth is likely to remain elevated. This will be augmented by the expected economic expansion, increase in government and private capex, support of PLI and other government schemes and push for retail credit. However, inflation remains a key risk.

 

For Q1FY23, Federal Bank reported its highest ever net profit of ₹ 600.66 crore, up 64 per cent on a YoY basis. Provisions and contingencies have also fallen sharply during the quarter to ₹ 166.68 crore from ₹ 639.94 crore on a YoY basis. Can you highlight the factors that are responsible for your exceptional outperformance? 

 

On the back of stable asset quality leading to lower credit costs and healthy operating performance, the bank could report the highest ever net profit. Credit growth has started picking up. Q1 saw strong broad-based growth, across segments, both on sequential and YoY basis. Our liability franchise continues to be granular and we remain focused to maintain our strength in that space.
 

In recent years, Federal Bank has become a significant player in digital banking. Can you elucidate how you are further leveraging new technologies and the wave of digital adoption?
 

Digitisation is the order of the world today and without being in the digital space no entity can survive. We have created a separate digital centre of excellence in 2016 and a separate team focusing on financial technology partnerships last year and have been focusing on many initiatives. During the early part of our journey, we were focusing on digital migration and then innovation in the digital space.From a new initiatives’ perspective, we are now focusing on the use of AI in customer service and our AI-based personal assistant Feddy is the digital face of the bank in multiple channels including WA, Alexa, Google Assistant, Web, Google Business Messaging, etc.
 

Customer experience (CX) is the defining competitive differentiator in the banking industry today and we too are focusing on our current products and services to determine whether there’s room to provide a greater degree of customercentricity and personalisation to enhance the financial services’ customer experience. Anticipating that the financial technology (fintech) revolution would have a significant impact in the years ahead, we created an open banking platform in the year 2017-18 and then started hosting APIs in the platform. We started to work with small fintech partners who helped us to enhance our offerings and competence.
 

And then we started many partnerships in the lending and financial inclusion space. Our strategy here is to partner with like-minded fintechs in different domains that will help the bank to build its balance-sheet through partnerships. The fintechs are present across PFM, neo banking, MF, equity and financial inclusion whilst there are many who want to do lending activities such as PL, BNPL, Auto, CD. We plan to partner with 2-3 significant players in each domain that will help us acquire new customers and which will also allow us to cross-sell various products to these customers with the help of partners.
 

Federal Bank has recently forayed into credit card and commercial vehicle financing. Do you expect high growth from these segments in the short to medium term?
 

The bank has been investing and building capabilities around high margin segments within the overall risk appetite of the bank and now it has started yielding results. We are seeing robust traction in all these businesses, particularly micro finance, commercial vehicle and credit cards. Over the next 2-3 years these business lines are expected to contribute more meaningful or incremental part to the overall business.
 

With healthy trends in growth momentum expected to persist, what is your earnings outlook for the next few quarters?
 

The bank is structurally well-placed for growth and is on course to meet the ROA commitments made. Credit quality remains strong. With granular liability franchise and strong core fee growth, the bank is on course to make sure that the FY23 earnings are along the expected lines.
 

At the moment, what are your top three strategic objectives?
 

The bank has a well-laid out Board of Directors-approved strategy in place to create long-term value. The focus is to execute on today’s imperatives and also radically innovate and transform the bank for the future.