Corporate loans a taboo, bad assets building up, alerts this ace banking analyst

After having burned their fingers in the bad loan crisis that roiled the power sector back in 2017, Indian banks have truly managed to turn a corner. They now record a robust credit growth amid low slippages, while constantly providing for bad loans. However, there might be more than what meets the eye, believes ASV Krishnan of HDFC Securities.

“I feel many banks don’t admit to funding capex anymore. That seems to be a taboo. May be because they feel capital markets will not like it if banks say that they are locking capital for a long duration with a corporate,” he said in an interview with Moneycontrol.

Krishnan, who has been tracking markets since 2006, has seen some critical ​cycles in the financial sector, from the IL&FS crisis to bad loan pile-up and recently, the robust credit growth cycle.

The credit cycle has been largely driven by retail lending, while corporate book has not taken off in a big way since the Covid lockdowns.

“That’s the surprising thing. Inflation was skyrocketing, which simply means demand was overshooting supply. When that happens, entrepreneurs, businessmen typically see the need to build more capacity. They know that capacity utilisation has reached a certain stage and they can incur capex. Strangely, that cycle did not take off from large companies,” he pointed out.

One of the reasons why banks are staying away from corporate lending is concentration risk. Across multiple capital-guzzling industries, we are entering a scenario where there are a few strong players left, said Krishnan. “Look at power, telecom and aviation. You have very few players left there. And, everybody wants to lend to them. Such a concentration risk can never be healthy,” he said.

As lenders continue to expand retail lending, Krishnan sees bad assets building up in the backyard. With competitive intensity high, everybody wants to dole out personal loans, which means risk is not being suitably priced, he said. “Bad assets are definitely building up, but it will take a while to play out on the balance sheet. This is only the start of the cycle.” Read the full interview here

Since March lows, the Nifty Bank index has gained over 15 percent, despite several banks reporting a decline in net interest margins in Q1 FY24. The lenders are expected to see further contraction in NIMs in FY24 as deposit rate hikes take effect better.

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