The Shifting Sands of Corporate Lending: A New Era for Private Banks
October 22, 2024, 5:36 am
The landscape of corporate lending is changing. Large private banks in India are feeling the tremors. In the second quarter of FY25, they reported a decline in their corporate loan books. This shift is not just a ripple; it’s a wave reshaping the banking sector.
HDFC Bank, Axis Bank, and Kotak Mahindra Bank are at the forefront of this transformation. They are grappling with pricing pressures that have led to a 2.8% sequential drop in wholesale loans. HDFC Bank’s corporate loans fell by 3% quarter-on-quarter and 12% year-on-year, settling at ₹4.67 lakh crore. Axis Bank’s corporate loans barely budged, down 0.1% to ₹2.90 lakh crore. Kotak Mahindra Bank saw a 1% decline, while Karur Vysya Bank experienced a more pronounced drop of 4% quarter-on-quarter.
Why this downturn? The answer lies in the numbers. Senior bankers point to a disconnect between policy rates and loan pricing. Policy rates have surged by 250 basis points, but the banks are not passing on these hikes to their corporate clients. Only half of the rate increase is reflected in the loans offered to top corporates. This gap creates a vacuum, pushing banks to seek higher yields elsewhere.
Corporate bonds are now the golden ticket. The spread on AAA-rated corporate bonds has increased by 17-30 basis points in Q2, while loan yields have stagnated. The competition is fierce, and traditional lenders are offering lower interest rates to attract clients. This has forced banks to rethink their strategies.
Kotak Mahindra Bank’s deputy MD emphasizes the need to view corporate loans alongside credit substitutes like corporate bonds and commercial papers. This broader perspective reveals a different story. While corporate loans may be dwindling, the credit substitute segment has surged by 32% year-on-year. SME loans are also on the rise, growing by 31% in the same period. This pivot towards SMEs indicates a strategic shift in focus.
RBL Bank is also navigating these waters. With a 2% yearly and 1% sequential drop in corporate loans, the bank is shifting its sights towards the SME segment. The aim is clear: generate higher fee and interest income from these smaller enterprises. The competitive landscape is changing, and RBL is choosing to adapt rather than compete in saturated markets.
In contrast, Karur Vysya Bank is riding a wave of success. The bank reported a 25% increase in net profit for Q2, reaching ₹473 crore. This growth is fueled by higher net interest income and improved asset quality. The operating profit surged by 28%, showcasing the bank’s robust performance. The net interest margin expanded slightly, indicating efficient management of resources.
Karur Vysya Bank’s asset quality is a beacon of hope in a challenging environment. The gross non-performing assets (NPA) ratio has dropped to 1.10%, down from 1.73% a year ago. This improvement reflects a disciplined approach to lending and risk management. The bank’s focus on retail, agriculture, and MSME sectors is paying off, contributing to a net profit of ₹932 crore for the first half of FY25.
The total business for Karur Vysya Bank crossed ₹1,76,138 crore, with deposits increasing by 15% year-on-year. However, the share of CASA deposits has declined, a trend that could signal shifting customer preferences. Despite this, the growth in gross advances by 14% year-on-year indicates a healthy appetite for credit.
The banking sector is at a crossroads. Large private banks are grappling with declining corporate loans while simultaneously seeking new avenues for growth. The shift towards SMEs and credit substitutes is a strategic response to a challenging environment. Meanwhile, banks like Karur Vysya are thriving by focusing on asset quality and diversified growth.
The future of corporate lending remains uncertain. As banks recalibrate their strategies, the emphasis on pricing, asset quality, and customer segments will be crucial. The competition will only intensify, and adaptability will be the key to survival. In this evolving landscape, banks must navigate the shifting sands with agility and foresight.
In conclusion, the corporate lending landscape is undergoing a metamorphosis. Large private banks are facing headwinds, but they are not without options. The rise of SMEs and credit substitutes offers a glimmer of hope. As they adapt to these changes, the banking sector will continue to evolve, shaping the financial future of India. The tides may be turbulent, but with the right strategies, banks can weather the storm and emerge stronger.
HDFC Bank, Axis Bank, and Kotak Mahindra Bank are at the forefront of this transformation. They are grappling with pricing pressures that have led to a 2.8% sequential drop in wholesale loans. HDFC Bank’s corporate loans fell by 3% quarter-on-quarter and 12% year-on-year, settling at ₹4.67 lakh crore. Axis Bank’s corporate loans barely budged, down 0.1% to ₹2.90 lakh crore. Kotak Mahindra Bank saw a 1% decline, while Karur Vysya Bank experienced a more pronounced drop of 4% quarter-on-quarter.
Why this downturn? The answer lies in the numbers. Senior bankers point to a disconnect between policy rates and loan pricing. Policy rates have surged by 250 basis points, but the banks are not passing on these hikes to their corporate clients. Only half of the rate increase is reflected in the loans offered to top corporates. This gap creates a vacuum, pushing banks to seek higher yields elsewhere.
Corporate bonds are now the golden ticket. The spread on AAA-rated corporate bonds has increased by 17-30 basis points in Q2, while loan yields have stagnated. The competition is fierce, and traditional lenders are offering lower interest rates to attract clients. This has forced banks to rethink their strategies.
Kotak Mahindra Bank’s deputy MD emphasizes the need to view corporate loans alongside credit substitutes like corporate bonds and commercial papers. This broader perspective reveals a different story. While corporate loans may be dwindling, the credit substitute segment has surged by 32% year-on-year. SME loans are also on the rise, growing by 31% in the same period. This pivot towards SMEs indicates a strategic shift in focus.
RBL Bank is also navigating these waters. With a 2% yearly and 1% sequential drop in corporate loans, the bank is shifting its sights towards the SME segment. The aim is clear: generate higher fee and interest income from these smaller enterprises. The competitive landscape is changing, and RBL is choosing to adapt rather than compete in saturated markets.
In contrast, Karur Vysya Bank is riding a wave of success. The bank reported a 25% increase in net profit for Q2, reaching ₹473 crore. This growth is fueled by higher net interest income and improved asset quality. The operating profit surged by 28%, showcasing the bank’s robust performance. The net interest margin expanded slightly, indicating efficient management of resources.
Karur Vysya Bank’s asset quality is a beacon of hope in a challenging environment. The gross non-performing assets (NPA) ratio has dropped to 1.10%, down from 1.73% a year ago. This improvement reflects a disciplined approach to lending and risk management. The bank’s focus on retail, agriculture, and MSME sectors is paying off, contributing to a net profit of ₹932 crore for the first half of FY25.
The total business for Karur Vysya Bank crossed ₹1,76,138 crore, with deposits increasing by 15% year-on-year. However, the share of CASA deposits has declined, a trend that could signal shifting customer preferences. Despite this, the growth in gross advances by 14% year-on-year indicates a healthy appetite for credit.
The banking sector is at a crossroads. Large private banks are grappling with declining corporate loans while simultaneously seeking new avenues for growth. The shift towards SMEs and credit substitutes is a strategic response to a challenging environment. Meanwhile, banks like Karur Vysya are thriving by focusing on asset quality and diversified growth.
The future of corporate lending remains uncertain. As banks recalibrate their strategies, the emphasis on pricing, asset quality, and customer segments will be crucial. The competition will only intensify, and adaptability will be the key to survival. In this evolving landscape, banks must navigate the shifting sands with agility and foresight.
In conclusion, the corporate lending landscape is undergoing a metamorphosis. Large private banks are facing headwinds, but they are not without options. The rise of SMEs and credit substitutes offers a glimmer of hope. As they adapt to these changes, the banking sector will continue to evolve, shaping the financial future of India. The tides may be turbulent, but with the right strategies, banks can weather the storm and emerge stronger.