Column : Learning to live with smaller margins

Written by Shobhana Subramanian | Updated: Feb 14 2013, 02:18am hrs
For close to two years now, bank stocks have turned up winners. Slice it any way3, 12, 18 or 24 monthsthe BSE Bankex has left the benchmarks far behind. To be sure, much of the action has been in private sector bankswith a larger weight in the bank indexwhich seem to have resisted the slowdown successfully, finding niches and playing to their strengths. The public sector players, on the other hand, have been weighed down by loan losses and recasts. But, overall, business has been far from brisk and, unfortunately, could get even more dull and dissatisfying; opportunities to lend are fast slipping away as the economy remains in a trough, scaring companies away from capex. Half the banks that have reported numbers for the December 2012 quarter have been unable to grow their loan books by more than 5% since March last year.

Since industry isnt really in a frame of mind to get going on new projects, its not surprising loan growth in 2012-13 so far has ticked up by less than 7%, all the more unexciting because it come off a base of just 9%. Also, while it might seem like factories are humming with activity, given companies are asking for more working capital, the truth is that the money isnt helping turn out more produce but is merely funding bigger inventories. If assets arent coming their way, the liabilities too are proving to be a challenge. Bankers are watching in dismay as customers leave less cash lying in current and savings accounts (CASA) because theyre paying more for the same basket of goods; the ever-reliable, sticky CASA is turning fickle, growing at barely 2%, nowhere close to the 35% seen in late 2010 or even the decent 15% in mid-2012.

Theres hope yet, predicated on an upturn in the economy that will encourage borrowing as interest rates fall. Some of this has, no doubt, begun to play out; lower headline and core inflation allowed the Reserve Bank of India (RBI) to trim policy rates in late January. The response, a grudging 5-25 basis points cut in base rates, might have been disappointing. But banks are clearly on the back-foot now with the CASA not coming in like before and the rise in prices not looking like it will ease enough to reverse the trendRBI itself believes inflation could head up a bit in April after tapering off by end-March. Additionally, the fear that customers might become disenchanted with term depositsnow coming in at a reasonable15% yoyhas limited their ability to lower returns on these products. Given the floor on the cost of funds, therefore, it will be hard for banks to cut loan rates but not take a hit on margins.

Indeed, that might be the only way out if they want to stay in business, given the universe of borrowersespecially from the corporate sectoris only growing smaller. With virtually no investments in sightproject sanctions in 2011-12 dropped off some 45-50% to R2.12 lakh crore over the previous year and its possible the drop would have been even more precipitous since thenopportunities for project finance are fast vanishing. Moreover, the sluggish economygrowing at just 5.4% in H1FY13 and estimated to decelerate to 5% in the rest of the yearwouldnt inspire confidence in companies to add to capacity just yet.

In a recent study, Credit Suisse says the aggregate borrowings by the top 50 borrowers, who account for 27% of banks corporate loans, will drop to single digits in FY14 from 21% in FY12. Given that demand for loans in India is primarily wholesale-driven69% of bank loansand leveraged to the investment cycle, the near-empty pipeline of projects suggests loan growth will only trend down. More important, as the study points out, corporate India is highly leveragedfor a sample of 3,000 companies, interest cover is at a decade-low of 3.1 times while debt-to-ebitda has inched up to 2.2 times. The urgent need to shed some debt and restore the gearing to manageable levels, before moving on with fresh investments, will be top priority for companies.

One could argue that banks shouldnt really be over-exposed to long-term lending since theres always the danger of ending up with an asset-liability mismatch. Right now though, with working capitalbeing their core segmentshrinking and working capital cycles stretched out, banks will need to look hard to find good credit risk. Also, given consumer confidence is low, the retail spacea fifth of bank loanscant be much of a hunting ground. Unless the job market picks up, which doesnt seem likely for at least another year, a 25-50 basis points cut in interest rates can hardly persuade consumers to leverage. In any case, as Credit Suisse points out, even if retail loans grow 50% in FY14, the kicker to overall loan growth would be just 1.5%. The scramble for quality top lineit makes little sense to lend mindlessly and then end up with credit costswill, therefore, force banks to become price takers. And to learn to live with smaller margins.