Banks turning their back on India Inc, focusing on lucrative retail lending

Slowing economy and higher tier-I capital requirement shifting focus to retail lending

Banks continue to shy away from giving loans to the corporate sector, and have confined themselves to retail banking, which has shown more resilience and is equally lucrative if not more. 

The fear of bad loans and stress in the corporate sector has dampened big-ticket lending. Most banks have shown a lower share of corporate loans on their books; and they now prefer to cherry-pick companies rather than bet on a sector or a group. Banks have diversified their risks when it comes to lending to their top 20 borrowers. 

The Reserve Bank of India (RBI) has issued a circular in June regarding risk diversification. In the circular, the RBI asked banks to make sure that they were not lending more than 20 per cent of their eligible capital to one borrower.

A thread currently running through the corporate banking wings is a flight to safety, and a sharp reduction in concentration risk. 

Experts say there are a number of reasons contributing to this slip in concentration risk. Banks are pursuing more granular growth. The trend of corporate lending has been dipping for the past four years.

Anil Gupta, ICRA’s sector head of financial sector rating, says, “Banks have reduced their lending to corporates because of the slowdown in various sectors. They have focused more on retail lending and the requirement of Tier I capital has also been increased by the regulator. In March 2015, banks were supposed to maintain 7 per cent of Tier I capital and by March 2020 it will become 9.5 per cent.”

The data suggests the top banks of the country have been taking the slow lane in giving loans to their top twenty borrowers. 

ICICI Bank’s total loan exposure to top 20 borrowers has slipped by 250 basis points (bps) in last three years. It stood at 13.3 per cent in FY16, 12.5 per cent in FY18 and reached 10.8 per cent in FY19. 

In Axis Bank’s case, their exposure to top twenty single borrowers as a percent of Tier I capital slipped 3,000 bps points in three years. It stood at 142 per cent in FY16 and slipped to 112 per cent in FY19.

For Federal Bank, the exposure to twenty largest borrowers as a percentage of total exposure slipped 689 bps in three years from 16.93 per cent in FY16 to 10.04 per cent in FY19. 

Commenting on this growing trend, Sumit Kakkar, chief credit officer of Federal Bank said, “We only lend to those corporates which have a cash-flow history of more than one year and debt servicing capabilities. We will not do any adventurous lending to high-risk borrowers. Demand for fresh capex from large corporates is tepid and we are cautious about the infrastructure sector. Demand is largely for refinancing though the small and medium enterprises’ sector has shown strong demand for credit.” 

For State Bank of India (SBI), its exposure to 20 largest borrowers as a percentage of its lending slipped by 308 bps in three years from 15.88 per cent in FY16 to 12.8 per cent in FY19. However, SBI Chairman Rajnish Kumar is optimistic that this situation will improve. “As the utilisation in working capital limits improves, the performance on the advances front will also improve. The ratio of wholesale to retail could then again change to 58:42.” 

He also added that, “If they (other banks) stop lending, I will expand in that space. It only means a bigger opportunity for me. There is still scope for SBI to lend in sectors such as roads, renewable energy, oil and gas.” 

Punjab National Bank (PNB) has also witnessed a decrease in domestic credit Risk Weighted Asset (RWA) density, which slipped by 1,616 bps in two years from 64.88 per cent in FY17 to 48.72 per cent in FY19. The data for FY16 was not available. 

It needs to be noted that every bank uses its own methodology to calculate their concentration risk, as seen above. 

The data also suggests retail lending has taken the front seat in the loan book. At the end of September 2019, Axis Bank had 64 per cent of retail and small-enterprise loans whereas corporate made the remaining book. Similarly, for SBI, 60 per cent of the loan book comprised retail, agriculture and micro, small and medium enterprises (MSMEs). This part was under 50 per cent of the total loan book two quarters ago. ICICI Bank’s loan book is near perfect at 50:50, between retail and  wholesale loans. Corporate loans account for about 48 per cent of HDFC Bank’s advances. 

Some bankers also say the resolution framework has also not been able to give lenders much required confidence of opening their purse-strings for companies.