Private banks focus on low-risk retail loans as corporate segment struggles

Private sector banks, which have released their December quarter numbers so far, have reported largely healthy numbers, continuing their earnings trend in the previous quarters. This is largely due to their increased focus on the retail lending segment and the appreciation on their investment portfolios. [caption id=“attachment_2030509” align=“alignleft” width=“380”]  Representational image. Reuters[/caption] What is also important to note is the stable asset quality trend exhibited by these lenders. The bad loans levels at these banks have largely been positive and the growth has been aided by improvement in interest and non-interest incomes. Most private banks have been increasingly focusing on the retail banking segment in the past few years, when the corporate loan demand has been generally tepid. Axis bank, which reported a an 18 percent jump in net profit to Rs 1,900 crore on Friday, showed a 24 percent growth in its retail loan book to Rs 99,219 crore as on 31 December 2014, which now accounts for 38 percent of its net advances. Corporate credit too grew 25 percent on year and stood at Rs 1,21,543 crore and accounted for 47 percent of net advances. Loans to small and medium size companies (SME) advances grew by 17 percent on a year on year basis and stood at Rs 39,805 crore at the end of December, constituting about 15 percent of the net advances. Axis bank’s net interest income, during the quarter, rose 20 percent on a year-on-year basis grew to Rs3,590 crore from Rs2,984 crore in the year-ago quarter. Other income, which mainly include trading and fee-incomes income, too grew by 24 percent to Rs 2,039 crore. The key contributor to the fee income of the Bank was retail banking, which grew by 41 percent. On asset quality side, Axis has maintained a stable trend. Gross non-performing assets (NPAs) of the lender, during the quarter, marginally rose to 1.34 percent from the year-ago quarter and almost same as the preceding quarter. Fresh slippages stood just about Rs 708 crore in the three-months period, while total upgrades, on account of improvement in asset quality, stood at Rs 225 crore and write-offs at Rs 94 crore. On a cumulative basis, the total restructured advances, as on 31 December, stood at Rs 6,808 crore, constituting 2.37 percent of its net advances. Another private-lender, Yes Bank, which reported a net profit of Rs 540 crore, up 30 percent on Wednesday, had logged a strong loan growth on the retail segment. Yes Bank’s total loan book grew by 32 percent, mainly propelled by growth in retail loans, which now constitute 31.3 percent of the total book, compared with 28.6 percent in the September quarter, while its corporate book shrank by 2.7 percentage points to 68.7 percent compared with the preceding quarter. Private banks are playing smart by increasingly shifting focus to low-risk retail customers in the absence of any significant pick up in the corporate loan segment. Corporate demand has been absent for the last two years in particular due to the economic slowdown. A pick up in corporate loans is likely going ahead when the expected pick up in the economic activities materialize. For now, retail is a safer bet for private banks. It is too early to see private banks’ robust numbers as an indication of what is store for the entire banking industry. For that, one needs to wait more for large banks, including state-run banks, to announce their earnings. In the last few years, when private banks largely stayed away from the high-risk infrastructure loans and project funding, the onus of rebooting a sagging economy was largely the responsibility of public banks, which is evident from the high bad loan levels reported by these banks so far. State-run banks are likely to show higher bad loan levels in the December quarter as well as projects are yet to come back on track and cash flow situation of mid-sized firms are yet to ease. As Firstpost has noted earlier , even as the number of fresh references to the CDR has come down in three months ended December, the number of companies which were taken out of the mechanism on account of failure rose significantly highlighting the persisting stress on the health of corporations. CDR is a mechanism under which banks offer relaxed repayment terms to troubled companies by elongating repayment period, reduced lending rates, repayment holiday (moratorium) or even a sacrifice in some cases. A CDR deal takes place if majority lenders in the forum agree to the deal. A total of 10 cases were referred to the CDR cell in the December quarter with loan amount totaling to Rs 7,000 crore compared with Rs 13,313 crore in the September quarter from 14 cases, according to data available from the CDR cell. This includes the Rs 7,000-8,000 crore loan recast proposal of Pipavav Defence & Offshore Engineering. On the other hand, about 35 cases worth Rs 20,000 crore failed on account of inability to revive operations or lack of compliance with regulations in the December quarter, while just two firms managed to exit successfully. Even if the economic recovery takes place at this stage, the good results of this will reflect on the balance sheets of banks only after a couple of quarters. Till then, the pain emerging from bad and restructured loans is likely to continue with state-run lenders. (Kishor Kadam contributed to this story)