Large and mid-sized private banks are going slow on growing their corporate loan book due to lower yields and are focusing on growing their higher yield generating retail loan book more, senior bankers said.
“From a relationship point of view, we want all of these top corporates with us, but from a pricing point of view we have seen some disruption over the last few quarters and so we are not going to bid, we are not going to compete on pricing to win over these loans. We want these relationships, but not necessarily at bargain prices,” said HDFC Bank CFO Srinivasan Vaidyanathan in a post-earnings call.
HDFC Bank’s wholesale loan book grew 11% year-on-year (y-o-y) to Rs 4.04 trillion as of June 30, but de-grew sequentially by 1-2%, the CFO said. At the same time, retail advances grew 18% y-o-y and 4% sequentially to Rs 6.57 trillion as of June-end. Consequently, while the share of retail loans in overall advances increased to 47% as of June-end from 44% a year ago, that of wholesale loans decreased to 53% from 56% in the same period.
While the trend is not uniform, the rate of growth in corporate loans has fallen for both ICICI Bank and Kotak Mahindra Bank in comparison with overall retail advances growth, according to the banks’ investor presentations.
Yes Bank saw its outstanding fund-based corporate loan book falling to Rs 49,520 crore as of June 30 from Rs 69,948 crore a year ago. Fund-based lending entails granting loans, overdrafts or other money transfer to a corporate, whereas non-fund-based exposure includes bank guarantees, letters of credit and bonds. Yes Bank chose to grow its non-fund based corporate book more in Q1 as it rose from Rs 50,079 crore during Q1FY23 to Rs 55,762 crore in Q1FY24.
According to the bank’s Q1 investor presentation, letters of credit and bank guarantees formed Rs 47,000 crore of the outstanding non-fund based corporate book. Yes Bank MD & CEO Prashant Kumar said the lender would not like to underwrite corporate loans at pricing that does not make commercial sense. The bank will first look at whether it makes sense to go for non-fund based exposure or a combination of fund-based and non-fund based exposure.
“Definitely there is an issue in terms of pricing mismatch (for corporate loans), in terms of expectations and where we would be able to do it. I think the proper risk pricing is something which we would not like to compromise,” Kumar said.
While the interest rate charged to corporates is in a different range for each bank, Kumar said broadly for a AAA-rated corporate the expectation is 8-8.25% yield while for A-rated corporates it is not more than 8.5%-8.75%. While rating is a parameter in assessing loan pricing, the sector that the bank is lending towards also matters, he said. Kumar said, the yield on a BBB-rated corporate company is 9.25-9.5%.
“It is more of a competition where banks are willing to underwrite loans at this price. That (mispricing) may happen because whenever there is a competition and people would like to grow in a particular segment, you cannot rule out the possibility of mispricing of risk,” the Yes Bank MD said.
RBL Bank MD & CEO R Subramaniakumar shared similar views. He told FE that the bank’s strategy on corporate loan growth is not driven by the pricing, but on cost of funds. Since the bank’s cost of funds is around 6%, it is already paying a little more as deposit cost and thus cannot afford low-yield large corporate lending.
“We are shifting towards commercial corporates, that is the medium and mid-sized industries, where we have a slightly better margin than what we get at corporates,” he said. He said the bank will instead focus on growing in the tier-2 and tier-3 cities where smaller commercial firms are located.
RBL Bank’s wholesale loans rose 8% y-o-y, but contracted 1% sequentially to Rs 32,221 crore as of June-end. Retail loans, meanwhile, grew 34% y-o-y and 8% on a quarterly basis to Rs 40,866 crore as of June-end.