With the merger of HDFC with HDFC Bank taking effect, the bank’s chief executive officer, Sashi Jagdishan, is looking to create a new HDFC Bank every four years. This might sound over-ambitious, given assets of close to Rs 30 trillion, but it is not impossible. Analysts estimate it would imply a compounded annual growth rate of roughly 19-20%. Now that HDFC Bank has 115 million strong customers and some 8,000 branches (the plan is to add over 1,500 branches every year) and can sell home loans, it is on a very strong wicket. Indeed, the large balance sheet will give it an even bigger edge over the competition. India surely needs fewer but bigger and stronger lenders if credit access is to be extended to second-tier and smaller businesses, which are undoubtedly riskier.
There is no doubt that other banks are also well-capitalised and that non-performing assets are low. However, given how the nature of banking is changing, it is going to take more than the current levels of capital to grow on a sustained basis and earn returns. Already, state-owned banks have been yielding shares to the more aggressive private sector lenders—their share of loans was just 56% at the end of March, down from 65% in March 2018. The share of private sector banks went up from 30% to 39% in the same period.
This trend can be expected to continue, especially because private sector lenders have an edge when it comes to digital banking. With the share of retail loans in the overall portfolio tipped to grow further, a robust digital platform will be important to win younger customers. Digitisation has also helped private banks move faster when it comes to building an MSME portfolio. Again, while metropolitan and urban centres have dominated loan portfolios for decades, the opportunities are now in the smaller towns. To cater to customers in these markets, private sector lenders have been teaming up with fintechs.
Meanwhile, the operations of several state-owned lenders, whose businesses were earlier driven by corporate loans and government business, have slowed, as evident in the marked deceleration in corporate credit. One reason for this is, of course, the evolution of the bond market, but the other factor is that bankers have become risk-averse while disbursing credit to companies that do not have a top-class rating. For this to change, balance sheets must become bigger so as to be able to absorb losses without being strained. Unless smaller companies have access to credit, the economy cannot grow as it should. One way to do this would be to initiate more mergers.
The government has done well so far in this regard despite the many challenges of such exercises. It could now try to speed up the privatisation process, which seems to have lost momentum. It is not just corporate loans; strong balance sheets are needed to grow the unsecured retail portfolios too, especially if the regulator increases the risk weights. If state-owned lenders stay small, they will find it hard to compete in the loan market, even with some of the bigger shadow lenders. That will affect their profitability, especially in times when interest rates are in a downward cycle. This is a good time for the government to privatise lenders as state-run banks are doing well and should fetch reasonably good valuations. It should not wait too long since there is a real risk of these lenders losing market share.