The performance of banks in the three months to September has been characterised not just by muted loan growth but also some deterioration in asset quality at several state-owned lenders and a couple of private sector banks. In a sluggish economy, the demand for corporate loans has been subdued for more than a year now; not too many new projects are taking off and working capital needs have shrunk both because commodity prices have fallen sharply and output is being scaled back. At Bank of India, loan growth fell 3% year-on-year. It’s not surprising, therefore, that banks are looking to lend more to individuals to grow their loan books; at ICICI Bank, for instance, retail loans grew 25% year-on-year in the three months to September, whereas loans to companies grew at around 7-8%. But it’s not as though the demand from households for big-ticket loans is too strong either. At mortgage player HDFC, top line momentum was muted with the increase in the net interest income lower at sub-10% compared with 14% in FY15. Loan growth, adjusting for sell-downs, came in at just about 18%, with loans to individuals growing at sub-15% before adjusting for sell-downs. That it’s not easy to do business even with individuals is clear from the rise in unsecured loans. Banks are clearly willing to take on risk to grow their books and, hopefully, this time around they will be more careful than they were in 2007-08 when large chunks of retail portfolios turned toxic.
Public sector banks are till grappling with bad loans. Bank of Baroda reported slippages of R6,900 crore, three times the recent run rate, while Bank of India reported a loss of R1,126 crore because slippages, especially from corporate book, were high at Rs 6,200 crore annualised and it needed to make provisions. But Axis Bank saw fresh impairments which were higher at 4.3% of loans, including the sale of a large loan to an asset reconstruction company. The commentary was cautious with bankers conceding demand for credit remains low, although there are signs of more projects taking off. Looking ahead, it would appear banks face several challenges including increasing disintermediation from bond markets. Companies are hitting bond markets more frequently since they’re able to raise funds at rates that are cheaper by at least 80-100 basis points. As much as Rs 2.42 lakh crore was picked up between April and September compared with the incremental lending by banks of around Rs 2.25 lakh crore in the corresponding period. It is possible banks are participating in these private placements; since much of the paper is rated AAA or AA+, asset quality should not be an issue, though spreads will be narrower than if they had disbursed a loan to the same borrower. But given how badly they’ve been burnt, banks probably want to play it safe for sometime.