Loan growth resumes, no matter if it's unequal across segments

The recently released RBI report shows a very unequal recovery in loan growth with the metropolitan segment leading growth. Interestingly, growth is stronger in smaller ticket loans. Demand on working capital is improving, but still weak. Even as private banks are leading on loan growth, we are seeing recovery in public banks as well. Although coming off a low base, one shouldn't be pessimistic on growth at this stage.

The study points recovery in loan growth. The only concern was it is still below pre-Covid levels. While States like Maharashtra, West Bengal and Gujarat are showing the fastest recovery, places like Bengaluru, Chennai, Pune, Hyderabad and NCR are showing further accelerating trends.

Actually, bulk of the growth, as per Kotak report, is seen in lower ticket size segments. Inflation-led demand for short-term loans is showing some recovery but growth is still dominated by long-term loans, and private banks are showing strong recovery trends in loan growth over public banks.

For starters, private sector lenders maintain better control on spreads, says a report by MOFSL. The Weighted Average Lending Rates (WALR) on fresh loans has increased by 35 basis points MoM, with private banks seeing a 26 basis points MoM increase v/s a 37 basis points rise for PSU banks. As a result, the Weighted Average Lending Rates (WALR) on outstanding loans rose a sharp 14 basis points MoM to 9.76 per cent for private Banks. The increase moderated slightly for PSU Banks (up 3 basis points MoM) at 8.23 per cent. The one-year MCLR rate for large banks expanded by 30-60 basis points over the last two months, but was narrower (-25bp to 45 basis points) for mid-size banks.

Spreads differential widens further between private and state-run banks. Private-sector lenders have always had a higher share of high yielding assets as compared to their PSU counterparts due to their dominance in unsecured loans. The lending yield differential between the two sets currently stands at 147 basis points. As RBI hikes rates further, we expect the spread differential between private and PSU banks to widen.

Banks with higher mix of floating rate book to gain; prefer ICICIBC and SBIN. Analysts expect a gradual increase in the lending yields for banks as RBI has hiked the repo rate by 90 basis points over the last two months. Moreover, they expect a further repo rate hike of 60-75 basis points over FY23. A higher CASA mix and calibrated increase in deposit rates, given the ample liquidity, will help limit the increase in portfolio deposit costs. Banks with a higher mix of floating-rate book stands to benefit from the turn in the rate cycle.

Behind the bullish trends of recovery, analysts continue to see two underlying themes. First, it is high levels of bullishness. This implies that they are likely to go down the risk curve or duration curve. Secondly, borrowers are still quite wary to undertake credit but there is an improvement as compared to where we were in the previous few quarters.