Mumbai: Pain on exposure to the demonetisation and GST-hit small businesses and the reverses in the investment book moderated profit growth of Kotak Mahindra Bank in the June quarter.
All this had the fourth-largest private sector lender reporting on Thursday a 16.90 per cent growth in net profit on a consolidated level at Rs 1,574.48 crore, while standalone profit growth slowed to 12.29 per cent at Rs 1,024.94 crore.
The SME book stood at Rs 18,000 crore or 10 per cent of the overall book and NPAs from this segment has shot up to 5 per cent against an overall 2.17 per cent. This has forced the lender to go slow on extending loans to this sector.
Joint managing director Dipak Gupta explained that trading segment among small and medium enterprises are facing margin pressure as the economy formalises and hence, there were higher instances of defaults.
Painting a not so rosy picture going ahead, he warned that the pain from this sector is not over yet and there will be "lot more NPA recognition" going forward.
"Up until now, most of us were carried away by the (poor) performance of the large and mid-corporate segment. A lot of us forgot that the SME sector can also have problems," Gupta said.
In what only aggravates the pain for the lender, Gupta said the bank is discovering that the value of the collateral has gone down by up to 40 per cent since the loans were sanctioned, leading to higher defaults. Coupled with this is the low realisation from liquidation exercises, resulting in lower recoveries.
"The realisable value on a collateral is lower now; either it was over valued at that point of time or market conditions have changed for the worse," he said.
SME loans amount to Rs 18,000 crore and contribute 10 per cent to the overall book of the bank that has been known for its good asset quality. And Gupta said NPAs from SMEs have shot up to 5 per cent from against the overall 2.17 per cent.
Chief financial officer Jaimin Bhatt chipped in saying a "decent chunk" of the provisions of Rs 200 crore on advanceshas come from SME loans alone.
Gupta said because of the reverses, the bank has consciously gone slow on lending to SMEs, one of the major driving forces for the economy.
Comments come at a time when many lenders are keen to increase their exposure to SMEs having badly bitten by their higher exposure to large corporates whom they are shunning now, and the sector is also getting a lot of attention from government given its importance to the economy.
The overall provisions more than doubled to Rs 470 crore, including Rs 260 crore for advances and unhedged forex exposures and Rs 209 crore towards investments, which were heightened because of the volatilities in the financial markets following the hardening of yields.
Gupta said the bank has not used the RBI dispensation to ammortise the reverses on investment portfolios over four quarters and booked all the pain upfront in the June quarter.
Fresh slippages came at Rs 320 crore, but Gupta said he expects overall credit costs for the full year to remain at the last year's level even though there has been some surge in the first quarter.
The core net interest income moved up 15 per cent to Rs 2,583 crore, while the non-interest income moved up to Rs 1,164 crore from Rs 906.88 crore.
The overall credit demand grew 24 per cent, driven primarily by a 40 per cent growth in the commercial vehicle and construction equipment book, a 25 per cent rise in corporates and 20 per cent growth in consumer loans.
Gupta said the corporate demand is not for greenfield projects but replacement demand either for NCLT resolution cases or refinance.
The share of the low-cost current and savings accounts increased to over 50 per cent and the margins were stable at 4.3 per cent. Bhatt said the margins will be within the range of 4.1-4.3 per cent.
The overall capital adequacy ratio of the bank stood at 17.76 per cent.
Gupta termed the asset management company plan toresolve sour loans floated by the government as "interesting" which the bank will "evaluate".
The bank scrip shed 3.69 per cent to close at Rs 1,350.25 on the BSE as against a 0.06 per cent correction on the benchmark.