MUMBAI: Indian banks are well poised to improve their loan growth by gaining market share from bond markets and non-banking finance companies (NBFCs), but the challenge is in competing with mutual funds and insurance for retail deposits, said CLSA analysts Aashish Agarwal and Prakhar Sharma in a report released on Friday, titled Indian Banks: Sector outlook – Overweight. “The banking players’ deposit franchise is weakening due to disintermediation by savings plans offer from mutual funds and insurers,” the report said.
As these instruments offer more tax efficient returns, banks have not been able to reap the benefits of “financialisation” of savings and have to depend on bonds and wholesale deposits for funds. Nondeposit sources formed 30 per cent of incremental deposit of banks last fiscal compared to 11 per cent in 2017 fiscal, it pointed out.
“Lenders face structural pressure in the area of retail term deposits, with non-bank players offering 33 per cent higher net-of-tax returns for the same gross yield,” CLSA said. The shift away from bank deposits is likely to add some pressure to bank funding costs, it said. On the lending side too, banks have been losing business to bonds/NBFCs with credit growth lagging behind at 7 per cent compared to 17 per cent of bond markets. CLSA expects this gap to narrow over next three years as banks’ recoup their market share and expand at 12 per cent, while bonds grow at 16 per cent.
After the second quarter earnings announcements, bank chiefs did indicate a shift in the market away from NBFCs, but said it is too early to predict a trend. “Private lenders are best placed to gain from this opportunity, given their stronger deposit franchise, better capitalisation and the PCA-related restrictions imposed on some PSUs,” CLSA said. Private players can see a growth rate of 23 per cent, whereas PSUs will be only 6 per cent, it said. While domestic lending has improved from 3 per cent in FY17 to around 13 to 14 per cent at present, the Nirav Modi fraud and ensuing tightening has led to decline of overseas lending business, leading to moderation in overall loan growth to 9 per cent.
“We believe that aggregate credit demand should improve with economic growth and a rising capex cycle. Despite subdued capex activity, we see the potential for investment in sectors such as roads and corporate spending as overall capacity utilisation levels have risen to 73 per cent and companies may seek to increase capital spend over the next 12-18 months,” CLSA said. The PCA framework restricting 11 PSBs that have around 19 per cent market share in the credit system is a positive development and will ensure better discipline in capital allocation and underwriting, the report said. On the NPA issue, CLSA said,
“With NPL ratios in the steel/ power sectors around 40%/20%, and non-NPL stress loans in the power sector at 1-2% of total loans, we believe the peak of tagging stressed loans as NPLs has largely past.” It expects bad loans to normalise to 3 per cent of past year loans in the current fiscal from 6 per cent last year. CLSA also analysed attrition at the top level of banks.
It observed frequent changes in the top brass at the PSBs and the recent RBI action curbing extensions of private bank CEOs. Analysing the loan recognition issues and RBI action of not granting extensions, it said, “We believe Boards need to make more independent decisions that may potentially challenge management. While this may slow the decision-making process, it will structurally put players on the right track.”