Margin pressure to continue, banks with improved fee income will fare better: Rajneesh Karnatak, Bank of India

Net interest margins of commercials banks will contract in the coming months, putting pressure on banks’ earnings, but lenders with strong non-interest income will perform better, said Rajneesh Karnatak, managing director and chief executive of Bank of India, in an interview with ET. Edited excerpts:

Analysts say profits have peaked for commercial banks. The challenge starts now with NIMs likely to shrink as treasury gains are already books, and big-ticket recovery is already done. Your comment?

Definitely, (maintaining) NIMs is challenging.Since February there has been a 50 bps cut in policy rate. On a ballpark basis, this translates into a NIM contraction of around 15 bps. On the loan side, those linked to repo or external benchmark are immediately repriced. But on the deposit side, the repricing takes 6 months-plus.

So, for February cut, repricing will significantly happen by September 2025, because most of the FDs are between six months and one year. Similarly for the April cut, repricing will happen by the end of October or November.

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Repo is at 6% and if it goes down, by say, 5.75%, then definitely there will be further pressure on NIMs. My personal belief is that banks that improve their non-interest income and recoveries will do well in this financial year. Yes, you rightly say many of the large accounts have been resolved. However, in all banks, there will be a lot of written off accounts, which is beyond the GNPA number. So if they are able to recover even 15% by putting in place the right OTS scheme, huge recoveries can be made by each bank.

Your overseas business contribution has stagnated at about 12% of advances and deposits business. Is it disappointing?
Internationally, we are present in 15 countries – US, UK, France, Belgium, Singapore, Japan, New Zealand and Africa, and so on. The GDP in these countries is much less compared with India. When India’s GDP is growing at a faster pace, my domestic book will always grow faster. On a year-on-year basis, international books are growing. We have closed it at around ₹2.18 lakh crore and we made a ₹1,100-crore net profit on the global book. But business wise, the US contributes the highest, at nearly 31% of international business. While 40% of the book is India-linked customers, mostly Indian corporates, 20% is the local lending, and 40% is trade finance. International books will remain at 12% of the global book.Bank of India has not been part of the government’s consolidation drive. In the next wave of consolidation, you would either be a target bank or an acquiring bank. How do you view this situation?
I would not like to comment on it. This is entirely the prerogative of the government and the regulator.

RBI has rolled back the risk weightage for NBFCs. How do you look at lending to them?
We have an NBFC book of ₹88,000 crore. Of this, around ₹71,000 crore is for domestic NBFC and around ₹9,000 crore is in the international book, where we funded Indian NBFCs through the ECB route.

On the asset quality side, 98% of this book is ‘A’ rated and above, and 2% is ‘BBB’ and below. Secondly, 51% is to the PSU and financial institutions-backed NBFC. The NPA in this book is at 1.2%.

Earlier also we had not stopped lending when RBI had raised risk weights. Only thing is that we had repriced our loan book. Repriced our loans to each of those NBFCs. Now, when it has been rolled back, some of the NBFCs have come back to lower the rate of interest, which we have done on a one-to-one basis.

PSU banks are unable to attract the affluent youth entering the workforce to open accounts. This is visible in terms of the market of PSU banks which is shrinking. Your thoughts?
You are right that a lot of digitisation is happening and the young customers want digital banking. As regards competition, which is there with the private sector, the competition is now equal in the sense that it is not a differentiator, because even public sector banks have very strong digital platforms now.

We are also a public sector bank and we are able to do 95% of our transactions on the digital platform. The big differentiator between a private bank and a public sector bank which used to be, say 10 years ago, is no more there. We also have very robust technology and robust cyber security platforms to keep their (customers’) money safe. So, customer service, how agile and robust our platform is, is what differentiates whether the customer wants to keep the account with A bank or B bank.

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