Retail, SME loans drive 21.3% bank loan growth

Loan growth for banks stood healthy at 21.3 per cent year-on-year and 1.4 per cent quarter-on-quarter, driven by sustained growth in the retail and SME segments, reveals a report by Nirmal Bang Institutional Equities.

Some of the key trends observed as per management commentaries included: (1) Slowing growth in microfinance, vehicle finance and unsecured PL segments due to stress build-up (2) moderation in credit growth in large corporate segment as some banks preferred to stay away from the rate competition and (3) Ample liquidity with PSBs can support their loan growth and margins going ahead. On the other hand, private banks, which have normalized LCRs of 110-120 per cent and high LDRs, are depending on branch/digital expansion to garner deposits, the report added.

Asset quality for our coverage universe continued to improve and credit costs remained benign. However, the quality of the unsecured exposure is still a key monitorable and in line with the guidance given by managements of some banks, we expect upward normalization in credit costs by 20-40bps in FY25/FY26, it added.

Analysts continue to prefer well capitalized private banks given their high return ratios and relative under-performance over the past two years. In private banks, our top picks are HDFC Bank, IndusInd Bank, ICICI Bank and Federal Bank. In PSBs, they prefer being selective and recommend SBI.

Talking to Bizz Buzz, M Narendra, former CMD, Indian Overseas Bank said, “With the risk weights increased on unsecured personal loans, and also the fact that it is in this category of unsecured credit there has been some concern expressed about probability of higher default and stressed assets, banks have been exercising caution on growth of unsecured personal loan growth and the portfolio is being getting moderated which is a good sign.”

The loan against jewellery or gold loan had also attracted supervisory concerns due to unacceptable practices practised by few players. Only those players who had the historical experience and expertise in handling gold loans should endeavour to grow this portfolio by adhering to all regulatory guidelines without any let up, he said.

The margin of all banks may be getting affected as they have to provide higher interest rates to attract deposits as deposit growth is lagging behind credit growth and there is huge competition for bulk deposits

At the same time corporates with better ratings will be scouting for best rates for their borrowings and hence only few larger banks with higher CASA ratio can compete in offering attractive rates for corporate loans.

It is therefore imperative for others to focus on retail loans, personal loans, MSME loans so as to protect their margins even though these loans to high networth individuals is also likely to have severe competition as they will also demand best rates overall banks are currently are in better position in terms of their financial strength.

“Specialized NBFCs: In our gold loan NBFC coverage, main highlight was improvement in gold loan AUM and gold tonnage/client growth on a QoQ basis. As mentioned in our gold finance sector report dated January 16, which was based on channel checks in Kerala and interactions with managements/industry laterals, we prefer Muthoot Finance first in this space due to its strong customer retention and acquisition initiatives, entry into new segments and growth based on internal accruals. In the infrastructure finance segment”, said Rati J Pandit, CFA, Lead Analyst – Banking Sector, Nirmal Bang Institutional Equities.

HUDCO reported strong loan growth of 30 per cent YoY and its credit costs remained negative. However, NIM declined to 3 per cent due to disbursements in 1QFY25 being back-ended, the full impact of which will be felt on revenue in 2QFY25. We are positive on HUDCO due to its niche position in Social Housing and Urban Infra Financing, its ability to grow faster (due to its robust capital position), improving margins and low risk on the balance sheet with higher government exposure.