Lenders brace for slowdown, to tread cautiously next year

Eager as they are to lend, banks are cautious not to allow a repeat of 2008-09, when non-performing assets had emerged as a big worry as the slowdown took hold.

Credit growth is expected to slow further next fiscal amid falling gross domestic product (GDP) growth. In such a situation, the importance of credit quality cannot be understated.

“We need to consistently look for borrowers of good credit quality for meeting their needs by way of expansion, new projects or otherwise to achieve desired credit growth. Even slowdown can provide opportunities,” said S Ananthakrishnan, executive director, IDBI Bank.

Sumit Bali, executive vice-president (consumer loans), Kotak Mahindra Bank, concurred. “Banks need to be a bit more careful. They need to be careful about credit purchase standards from now. That can be done by increasing due diligence. By and large, banks should manage risks far more closely,” he said.

Paul Abraham, chief operating officer, IndusInd Bank said, “We have to make sure that we are watching all the exposures very closely.”

Bankers stress the need to enhance credit monitoring.

Relationship managers will need to do their job more intensely and the risk chain will be mandated to take a watchful look at every proposition that is sent to them, said Abraham. A few banks have already begun the process.

Bank of Baroda, for one, plans to get the talent pool involved in credit monitoring in a centralised place. This will help it improve processing of loans for better quality lending.

On its part, IDBI Bank rates customers on four parameters — prospects of the industry they operate in, the position of the borrowing company within the industry, its management quality and financials, said Ananthakrishnan.

This could spell trouble for some corporates, say bankers.
Corporates with a lot of leverage and companies with a lot of unhedged foreign currency loans may be denied bank credit, said Jaideep Iyer, senior president - financial management, Yes Bank.
All the same, some analysts feel the asset quality of banks will be under stress in view of slower GDP growth.

“If interest rates start falling from next fiscal, it will help banks to reduce slippages. But at the same time, the most important thing is that GDP growth will slow down and that will have an impact on bad loans of banks,” said Vaibhav Agrawal, vice-president (research), Angel Broking.

Agrawal sees an average increase of 50 basis points in the net NPAs of banks in the next one year.

The Reserve Bank of India’s projected credit growth for this fiscal is 18%.

For the next fiscal, bankers expect the projection to be in the 15-17% range, more down than up. Still, some remain bullish on retail loans.

“We are pushing retail and SME sector lending as the absorption in these sectors is still fine. In the retail segment, it will be mostly home loans,” said B A Prabhakar, executive director, Bank of India.
Banks also plan to disburse more to their quality borrowers rather than to risky ones, in order to meet their credit growth target next fiscal.

However, private sector banks do not have much to worry, feel analysts.

“Most private banks are likely to outpace system growth by anywhere between 3% and 10% over our forecast period to 2014,” Sachin Sheth, Tejas Mehta and Todd Dunivant of HSBC Securities and Capital Markets said in a report this month.

According to the report, Yes Bank is more focused on liabilities and the analysts believe its growth is likely to be dominated by wholesale for now. HDFC Bank is likely to maintain strong growth in the consumer segment although it can be expected that a slowdown in vehicle loans shall moderate pace averaging
25% over the medium term. As for ICICI Bank, it is expected to grow in line with the system as retail loan repayments could hamper any acceleration in mortgage growth in the near term —- its focus remains more on leveraging its now-large branch franchise for retail liabilities, assets and fees.