The Telegraph
Monday , February 3 , 2014
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Gap in bank retail focus strategy

Mumbai, Feb. 2: Banks have focussed on retail loans to drive business during the slowdown in the economy, but the trend has impacted their core income growth.

Both private sector banks and their nationalised peers have given preference to retail loans since the offtake from the corporate sector suffered, with the growth rate of the Indian economy falling to an estimated 4.5 per cent in 2012-13 from 6.7 per cent in 2011-12.

Lenders have earned higher profits in absolute terms by putting a larger share in retail lending. They have also benefited on asset quality as defaults are lower in segments such as home loans compared with corporate loans.

However, analysts fear the stress on retail loans may slow down the net interest income (NII) growth of banks. This is because yields in the retail segment are lower vis-a-vis corporate borrowers. NII, considered the core income of banks, is the difference between interest earned and interest cost.

“We maintain our negative view on net interest margin (NIM — a key measure of profitability) outlook for banks and believe NII growth is likely to be slower,” says M.B. Mahesh of Kotak Institutional Equities.

Mahesh said NII growth for banks had already fallen to 20 per cent at present from 25 per cent in the last fiscal, and there was a possibility of it further slowing down.

According to the brokerage, while the loan mix of many banks will continue to be adverse from the yield perspective, the retail segment is likely to make a higher contribution to loan growth.

A senior official from a private sector bank told The Telegraph that though retail loans would continue to drive loan growth, net income growth was likely to remain stable — and not increase — from here on. “I do not anticipate any fall in the yields, particularly in the retail loan segment,” he said.

Further, yields (difference) between corporate and retail loans have expanded over the past couple of years and it is now estimated to come between 75-100 basis points.

Offtake of corporate loans has fallen with ICICI Bank witnessing a 17 per cent year-on-year decline in commercial business loans as on December 31. On the other hand, term loans (where yields are relatively higher) are not expected to show any significant rise; demand is likely to come from working-capital loans where yields are lower.