Why banks are becoming attractive again

Experts believe the worst might be over for the sector that has struggled with non-performing assets (NPAs) and sluggish growth. Still, the third wave of covid-19 could pose challenges in the coming months, driving up bad loans and possibly changing the outlook.

“We expect consumption, which so far has been lagging, to pick up in a broad-based manner as vaccination rates cover the entire eligible population. Improving end-demand (consumption and exports) should push capacity utilization rates higher, alongside a conducive policy environment, which should push up private capex from the second half of 2022," analysts at Morgan Stanley said in note to clients on 19 January.

Morgan Stanley believes the Reserve Bank of India (RBI) will start policy normalization with a reverse repo rate hike in February. It also expects repo rate hikes from the April policy meeting, with cumulative hikes of 125 basis points in 2022. This normalization, analysts argue, would benefit banks as their loans get repriced.

Bankers said that corporate loan demand is rising, and things would soon improve as capex plans firm up, although demand is primarily for working capital and not term loans. To be sure, retail loans are still doing the heavy lifting for banks.

“It is coming across all segments. Some of it is capex but most of it is working capital. It includes state-owned enterprises as well. Yes, the government is spending a lot on infrastructure and wherever we get opportunities and which falls within our risk appetite, we are happy to fund it," said Sandeep Batra, executive director, ICICI Bank.

ICICI Bank on Saturday reported an 18% growth in its domestic loanbook. While retail loans grew 19% from a year earlier, “domestic corporate and others" segment grew 12.5%. The bank’s retail loanbook of ₹5.02 trillion as on 31 December is being primarily driven by mortgages, a segment that grew 23% to ₹ 2.78 trillion.

According to CareEdge Ratings (formerly Care Ratings), in the past two to three years, credit growth was also depressed due to the resolution of high-value NPAs, which pushed down headline numbers.

“With the high-value NPAs resolution now largely over, the pressure on corporate headline numbers now looks better. However, the banking sector is optimistic about corporate loan growth as business activities are picking up and corporates are showing interest for re-leveraging. Credit growth has been buttressed by retail and MSME loans," the rating agency said in a report on Saturday.

Some banks have decided to target specific corporate segments, instead of going all-out. For instance, IDBI Bank is focusing on loans to mid-corporates or those with revenues of up to ₹750 crore. The bank said it is seeing significant growth from this segment and is not only increasing its exposure to existing borrowers, but wooing back those borrowers it had to let go of when it was placed under the banking regulator’s prompt corrective action (PCA) framework.