Bank of Baroda to increase business loans as return ratios rise

12 Jul 2022 , 11:12 AM

Bank of Baroda, the second-largest state-owned lender in India, is re-entering the corporate lending market with an eye on robust growth driven by a recovery in the capex cycle. The bank plans to treble the rate of expansion this fiscal year after increasing business loans by 3% last year.

Corporate loans are a lucrative industry thanks to a rising interest rate cycle, broader spreads, better quality assets, and risk-return measures, managing director Sanjiv Chadha told ET.

The rate normalization cycle, according to Chadha, “allows us to have decent growth along with decent profitability; therefore, we expect that corporate loans will rise substantially quicker for us as compared to the previous year.”

He continued by saying that because the return ratios were improving, the bank will abandon its pessimistic assessment of the corporate market.

According to the risk-return perspective, “you constantly want to make sure that your option makes sense,” he advised. “We discovered in the corporate section of the market last year that at times the spreads available to us were too small considering the risk we bear due to the extremely high overhang of liquidity and the artificially low rates. Therefore, we had grown our business credit portfolio in a fairly prudent manner.”

Corporate credit expanded in May after declining for several years as India Inc. solidified its capital investment plans. From a decrease of 0.2% in the same month last year, credit outstanding in this sector increased by 8.7% in May 2022.

The expansion was brought on by the micro, small, and medium enterprises segments, which had strong growth of 33.0% and 49.3%, respectively. This was caused by ECLGS, the low base effect, the need for more working capital, an increase in exports, and the use of digitized processes by banks for quicker loan approvals.

Due to higher working capital requirements brought on by elevated inflation, improving business activity, and a shift in borrowing to banking systems as a result of hardening capital market rates, the large enterprise segment–which accounts for 75.7% of the industry–reported growth of 1.9% in May 2022 (up from a decline of 3.1% in May 2021).

According to Chadha, the bank is particularly noticing a rise in credit in the sectors of steel, cement, roads, and renewable energy. Due to the deleveraging that has occurred in several industries and the increased likelihood that banks will resume lending to large corporations, demand from the corporate segment is increasing.