Private sector banks, with relatively lower corporate bad loans than state-run peers, are waiting at the starting line for the capex cycle to resume. Project financing, which banks once thrived on, has slowed to a crawl in the past few years led by excess capacity, delays in approvals and as corporates executing projects ran into repayment troubles. But, with the pain almost over and capacity utilisation crossing 75 per cent, hopes of a revival are high among lenders.
“One of the things which I think differentiates us is the strong corporate focus... And think of the times when the capex cycle turns, how well positioned Yes Bank would be to ride that crest,” Ravneet Gill, MD & CEO, Yes Bank told analysts after announcing the bank’s annual financial results last week.
According to Gill, for Yes Bank, which has built itself into the fourth largest private sector lender over the past few years at a time when corporate India wasn’t exactly flourishing, structured finance has been one of its key businesses.
Given the fact that complex financing typically tends to be a bespoke business, there remains doubts in terms of its scalability, predictability and sustainability, reasoned Gill. “That becomes the first trigger for banks to build other growth engines alongside the corporate business,” he explained.
The bank has seen a flat performance in the medium enterprise space, but recorded a 70 bps mix improvement in the small and micro space and a 150 bps mix improvement in the retail banking space. As a consequence, the share of corporate banking has come down from 67.8 per cent as on December 2018 to 65.6 per cent.
Going further, over the next five to six years, the bank hopes to have the retail-SME book accounting for 50 per cent, while corporate reduces further to 50 per cent progressively. The reduction in the corporate book is not solely because of lower lending to projects, but also due to the widening advances base of retail and other segments. “We also don’t want to grow the retail and SME businesses so far that we have other issues that might come up. So, we will smoothen the transition, but we will have a plan which we are already working on,” said Rajat Monga, Senior Group President, Yes Bank.
Typically, project financing has been the mainstay for state-run lenders, while private peers took limited exposure. But, despite their measured moves, some bore the brunt of bad loans with the RBI forcing lenders to clean up the books at once. Not doing so even cost some founders — like Rana Kapoor — their jobs.
“In the corporate book, we are systematically increasing the provisioning by following a formula-based approach for putting aside provisions on weak standard assets with no subjectivity involved,” said Amitabh Chaudhry, CEO, Axis Bank. Within corporate banking, domestic loan growth stood at 17 per cent, but it is the international book that punctured hopes of higher profit, having witnessed a de-growth of 33 per cent y-o-y. “Within the corporate book, our mix has been shifting steadily to better-rated clients... This shift in strategy shows up as a noticeable lowering of our risk-weighted assets to assets ratio,” he said. The RWA to assets ratio also improved to 69 per cent at the end of the fourth quarter.
Corporate credit related fees were flat during the fourth quarter of FY19, much like the quarter before. But broadly, corporate banking fees have actually stabilized in the last couple of quarters. “So, in spite of us moving towards a more high-rated book, which is only increasing over a period of time, our fee has stabilized,” he said, adding that it will start picking up and will see growth.
“We intend to get our winning mindset back, reclaim our growth momentum and get our fair share of business from our customers. Most important of all, we intend to build sustainability in our business performance and operations with disciplined execution and conservatism at its core,” he told analysts.
Meanwhile, Kotak Mahindra Bank was an outlier, with its corporate banking growing in double digits at over 19 per cent in FY19 over the previous year. It currently accounts for about 30 per cent of the bank’s total loan book and the bank’s MD & CEO Uday Kotak remains hopeful of retaining growth in the current fiscal.
Corporate credit in private banks
Project financing has slowed to a crawl in the past few years led by excess capacity, delays in approvals and as corporates executing projects ran into repayment troubles
But, with the pain almost over now, hopes of a revival in the segment are high among the country’s lenders