First Rand shifts India focus to pare losses

Mumbai: First Rand Bank Ltd, South Africa’s largest lender by market capitalization, will focus on lending to individuals in India, and a revival in the local economy will help it wipe out the losses the lender had suffered in the past five years in the country, chief executive and country manager Rohit Wahi said in an interview on Wednesday. The bank’s loss in India widened to Rs.77 crore in fiscal 2013-14 from Rs.59 crore in the previous year, as gross non-performing assets (NPAs) increased to 15% of its loan book in the year ended March 2014 because many loans given to medium-sized companies turned bad. The bank shrunk its loan book to Rs.199 crore in fiscal 2013-14 from Rs.259 crore in 2012-13, but will increase its balance sheet this year as it expects economic growth to accelerate, Wahi said. In February, the bank infused $21 million (around Rs.126 crore) into its Indian business in anticipation of higher losses. So far, the bank has invested more than $100 million in India. “We have learnt from (the losses in) our commercial business, we know what we should not have done and we have incorporated them in our origination strategy. We have not changed our view on India but have narrowed down our origination strategy more than before,” Wahi said. Commercial lending is to medium-sized companies with Rs.300-500 crore revenue per year. These are companies linked to sectors like pharmaceuticals and auto components. The loans to these companies were given previously but went bad last year as the economy slowed. S. Ranganathan, head of research at LKP Securities Ltd, said foreign banks like FirstRand have suffered because of faulty due diligence processes and lending to lower rated companies, lured by higher interest rates. “These Tier II and III companies are notorious for dressing up their balance sheets and leverage more than they can chew. Many of these companies have done acquisitions that have turned disastrous. For the banks, the spread on loans looked very lucrative compared to their home markets, which is why they lent to them and are now paying the price,” Ranganathan said. Wahi expects accretion of bad loans to slow and FirstRand’s India business to break even in 2016-17. “It’s a combination of economy picking up and commercial business will pick up. Retail (business) will also contribute.. As the revenue lines start picking up, even if economy does not grow at 7% in 2017 or grows at just 6.5%, with the focus we have and what we are seeing in our pilots, we are reasonably confident it will happen,” Wahi said. FirstRand commenced its Indian banking operations in 2009 primarily as a corporate and investment bank. It was only in 2012 that it started focusing on retail banking, mainly opening no-frills bank accounts and helping the unbanked transfer money within the country. It has 70,000 such active accounts in Mumbai and suburban Thane which it has opened through nine banking correspondents and 60 customer service points or kirana shops in the city. Currently, the bank has a single branch in Mumbai and it is allowed to provide services only in the city and adjoining Thane. To attract depositors, the bank earlier this month said it will offer 7.25% interest on savings account deposits up to Rs.10 lakh and 8.5% above Rs.10 lakh. This fiscal year, FirstRand started giving loans to individual borrowers with an average loan size of Rs.20,000. Wahi said this business, along with its commercial banking business, will form the engine of the bank’s growth in the future. “We have 2,500 borrowers now. Once our strategy is signed off in retail and commercial banking in the next six to eight months, we will look at more branches. It will be a sizeable portion of our portfolio,” Wahi said about retail banking. FirstRand’s strategy differs from its larger foreign banking rivals who have gone slow on their retail ventures in India mainly due to its high costs. Wahi said the bank has consciously avoided fighting larger rivals and targeting a numbers-led growth. “Targets will bring in bad behaviour in terms of processes and risk mitigation. I am more interested in perfecting the ecosystem and the processes. The numbers will flow easily after that,” he said. 

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