IndusInd Bank rejigs loan portfolio

IndusInd Bank is planning to re-balance its retail portfolio by reducing its dependence on vehicle financing on account of the rising interest rate risks. The bank had earlier decided to offer personal loans only to customers with corporate salary accounts due to fears of defaults.

"As a part of our overall strategy, we want to reduce the share of vehicle finance loans in our total loan book to about 40 to 45 per cent from the existing 58 per cent,'' said managing director, Bhaskar Ghose.

Of the bank's total loan book, 58 per cent accounts for vehicle finance loans, 13 per cent constitutes other retail loans and wholesale (corporate) loans make up the rest.

"Over dependence on a particular business segment could expose a bank to the risk of credit concentration. There is a realisation that the vehicle finance business can make you vulnerable to interest rate risks. These loans are 2 to 3 years, fixed rate loans. Attempts to convert these fixed rate loans to floating rates have not been accepted by the market. Hence, there is a interest rate risk in this business segment as you cannot re-price the loan based on the interest rate changes,'' added Ghose.

The interest rates on commercial vehicle finance loans plunged around two years ago when major private sector banks entered the business and in a bid to gain market share, they undercut the market. As a consequence, the rates fell to as low as 8 per cent from the existing range of 25 per cent to 30 per cent.

"The sharp drop in vehicle finance rates hit the existing players in the market and forced them to book loans at lower rates to maintain their market share. However, the rates have now stabilised at around 15 per cent. Players such as IndusInd Bank who booked loans for as low as 8 per cent were hit as these were fixed rate loans and they had no option to reprice the loans,'' said a banking analyst.

The dipping sales numbers of leading commercial vehicle manufacturers in recent months has also raised eyebrows among bankers. Bankers admit that there has been a slowdown in the vehicle financing business as interest rates have hardened. Interest rates on vehicle loans have risen by 300-350 basis points over the year.

"We are not financing manufacturers of commercial vehicles. We are financing buyers who are spread across the country. Hence, we do not see any impact. However, the rising interest rates have definitely hit loan growth,'' said the retail head of a private sector bank. Fitch downgrades rating: Fitch ratings has downgraded IndusInd Bank (IBL's) rating citing weak financials compared with its peers and continued vulnerability in a rising interest rate scenario.

The bank's long term national long-term rating to A (ind) from A+ (ind), indicates strong credit risk compared with other issuers in the country. The outlook on the bank continues to be stable based on management's initiative to improve the bank's financials and reduce its sensitivity to interest rate movements through higher share of floating rate assets and low cost deposits.

IndusInd's net interest margin (NIM) has declined steeply over the last two years in a rising interest rate environment owing to its higher proportion of fixed-rate retail loans and wholesale term deposits, said the rating agency. The proportion of fixed-rate retail loan stood at 60 per cent, while wholesale term deposits constituted 75 per cent of the bank's total deposits.

The bank's NIM would improve if its borrowing costs were to remain steady or decline as the yield on incremental loans has increased, sustained improvement in NIM may take more than a couple of years and would result from greater diversification of loan portfolio and improved retail deposit franchise, said the rating agency.

In September 2006, the rating agency had revised its outlook to negative from stable to reflect its low equity/assets ratio, which was at 4.5 per cent at June 2006, the lowest in the national rating category among Indian banks rated by Fitch.

The GDR issue in March 2007 helped the bank improve its equity/assets ratio to 5.1 per cent at financial year end 2007. However, the ratio is still lower than the banking system's median ratio, which stands at 5.7 per cent at the end of financial year 2007.