We have started the new fiscal amidst uncertainty. What is the outlook for the year?
Last year, GDP growth was negative. This year, even if there is a correction from the initial double digit estimates for real GDP, norminal growth will be 13% to 14%, which will have some implications on credit growth. We are looking at a loan growth of 7% to 10% compared to 5% last year.
Our retail book grew by 14% and this year we expect something similar except corporate will grow faster led by norminal GDP growth and inventory build up though capex may be further delayed. In some segments, we may see traction like the road sector where the government has spent heavily, city gas projects, renewables food processing, healthcare and steel sectors. Last year, corporate loan growth was negligible at 0.02% but we saw a significant growth in bond investments as companies raised money. This year we expect corporate growth to improve to 5% to 7%.
You have previously mentioned about stress building up in retail and MSMEs. Given the situation we are in has it become worse?
Our assessment was, as compared to historical levels, the retail stress will be more. MSMEs have also been hit hard due to the pandemic in the last 12 months. One the other hand, the corporate credit cycle is improving significantly and given the relative size of the books the improvement in corporate credit will far outweigh the incremental stress in retail and MSME. Net credit costs will come down.
Stress in retail and MSMEs will be higher but fortunately the RBI and government have been very proactive with restructuring and ECLGS schemes which will mitigate this impact. On retail there have not been much impact on jobs but yes there could be on personal finances which can be helped by restructuring. Although, I think only a minority of those eligible will take opt for restructuring on retail loans because there are costs in terms of interest and impact in terms of credit scores.
What is your assessment in terms of restructuring this time?
Last year, 2/3rds of the loans restructured were from corporates. In the second wave, there has been no impact on companies as they have continued to function. Hence, our assessment is that overall our restructuring will be lower than last year simply because the corporate piece will be of a much lower order. MSME restructuring will be more significant but it will be done on a case to case basis.
Overall, our restructured loans are expected to be below 1% of the book. Retail is 20% and MSME loans are 15% of our book but here again 2/3rd of our retail book is mortgages which is secured and 70% of incremental agriculture loans are backed by gold so the quality of the loans is assured. By 30th June we should get a fair idea if there is a delay in payments or need for restructuring. Our collection efficiency was up to 93% in March and the impact really has been since mid of April so we have to still assess it.
So what is the outlook in slippages and credit costs?
We should see further improvement both in terms of slippages and credit costs this year. We expect slippages to come down below 2% from 2.71% in fiscal 2021 and credit costs closer to 1.5% of loans from 1.68% in fiscal 2021. We continue to hold 20% provisions on sub standard assets compared to the 15% required by the RBI. We also hold Covid related provisions as required by RBI.
We have a 82% provision coverage ratio and as credit costs come down our capacity to provide is not an issue with a 15% capital adequacy ratio. Even without raising capital our internal accruals of Rs 4000 crore were sufficient to fund the growth we saw last year. This year too even with a 15% capital adequacy our internal accruals will be enough to fund our growth and as per plan we need not go to the market this year.
What is the plan in terms for your subsidiaries?
A significant number of our subsidiaries are doing very well. Our Uganda and Kenyan subsidiaries have a return on equity of 15% to 20%. There are some like in Trinidad & Tobago and Hong Kong which we have sold and some other smaller ones which are not worth our while which we will sell.
Locally, we are stakeholders in IndiaFirst Life, where will be taking a call on listing that business towards the end of next fiscal. We are expecting the final approval for merging our mutual fund with BNP Paribas in a month or two. We are seeing good traction in our credit card business and we think this year we could get a partner in that business either through a strategic investment or a private equity round for a minority stake.
Is the amalgamation of Dena Bank and Vijaya Bank complete? Has the pandemic led to any changes in plans?
Not at all. We have been on track with our plans and hence savings. We expect to save Rs 2000 crore this year. Our operating costs other than salaries have grown at a rate lower inflation because of the benefit of the merger. We have closed 1300 or 15% of branches. We have also managed to sell some real estate like the Dena Bank corporate building in BKC last quarter for Rs 380 crore to LIC.