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Consumption-related Mudra loans not performing well, says Bank of Baroda

Updated : September 23, 2019 01:15 PM IST

Finance Minister Nirmala Sitharaman on Friday announced corporate tax cut and unveiled a fresh credit push. She urged banks to organize ‘loan shamiana’, loan gatherings across several districts, which could be attended by union ministers and lawmakers.

PS Jayakumar, MD & CEO of Bank of Baroda, spoke to CNBC-TV18 about the benefits of the corporate tax rate cuts, the retail loan push, Mudra loans etc.

Talking about Mudra loans, he said, "I would like to look at it in two different ways. One, there is a section of Mudra loan that does not pay, which probably is consumption-related and we are therefore trying to go for high-ticket Mudra loan, which effectively is providing a higher level of performance. The fact is that when you finance 100 customers and 95 of them do well then to that extent there is a significant positive effect on the economy in as much as it is creating more employment opportunity in the unorganized sector.”

“So, we have to give Mudra little bit of time but my experience in consumer business is that over a period of time bad loans pay off and then you identify the right type of customers and you can scale them up,” he said.

With regards to the MSMEs, he said, “We are looking at some of the MSME NPA or potential NPA and wondering how we could let this happen. The payment cycle has expanded from 90-150 days and as a bank, if we don’t readjust the receivable cycle for the customer, there is going to be a problem.

When asked how much more the bank could keep as profits after the announcement of corporate tax rate cuts he said, “Our guidance was a pre-tax earnings of Rs 6000 crore flowing into profit after tax of about Rs 4000 crore, assuming nothing changes the net effect would be Rs 400-500 crore in terms of net earnings.”

Talking about the monetary transmission, he said “What we have seen based on data - when you take a 3-5 year view and look at monetary transmission and effect on net interest margins, effectively whatever has been the reduction in repo rate has been passed back to customers and during this period NIMs have not been necessarily impacted, it has been impacted primarily on account of non-earning asset.”

“My surmise is that as long as we keep the focus and ensure that we have are good recoveries and non-earning asset component of our balance sheet comes off, it would to large extent nullify any potential margin reduction but when you take a 3-5 year empirical data it is suggestive of the fact that there is no real material impact on NIMs,” said Jayakumar.
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