Banking & Financial Services: Loan growth should ease but become more broad based and sustainable

5 Jan 2024 , 10:59 AM

Banking system loan growth has been robust at mid-teens, thanks to the confluence of favorable supply side (improving data availability, robust asset quality and bank capitalization, end of capital market disintermediation) and demand-side factors (rising consumption led loan demand and shift from unorganized to formal financing). However, recent regulatory tightening (increase in the risk-weights) and the RBI’s nudge to lower credit-deposit ratio should drive some slowdown in the loan growth run-rate in IIFL’s view. Analysts at IIFL Capital Services expect banking system loan growth to slow down to 13-14% in FY25. But it should become more broad based on the back of (i) capex green shoots driving a pick-up in corporate loan demand, (ii) structural growth potential in MSME as the lenders move from collateral based underwriting to cash-flow based, and (iii) scale back of unsecured lending. With large Private lenders expanding distribution network and diversifying into more segments, analysts at IIFL Capital Services expect them to continue chipping away market share from PSU banks. Axis, HDFCB and IIB are their top picks.

Capex-led corporate loan demand to pick-up, but to reflect only with a lag

Corporate credit growth has been weak in most part of the last decade, and banks have lost 25pp market share. However, corporate India has been deleveraging (improving debt-to-equity and interest coverage ratios), and the ROEs are at the best levels since the GFC. This is particularly important because capex is driven by the profit cycles. Some green-shoots are already visible with listed companies’ capex growth finally surpassing nominal GDP growth in FY23, and new private sector project announcements rising (but still nowhere near the peak levels witnessed during 2005-2010). However, pending disbursements are at just 1.4% of loans and credit utilization remains low. Hence analysts at IIFL Capital Services do not expect significant acceleration as yet.

Unsecured loans to slow; under-penetration in other retail segments offers growth headroom

Recent increase in the risk weights and rising delinquencies in some segments (small ticket PL, credit cards and MFI) should drive growth moderation for unsecured consumer loans from 25% YoY in FY23. Lenders have already started scaling back growth in these segments, tightening underwriting for both ETC and NTC customers, and are evaluating interest rate hikes. However, low penetration levels and strong demand in mortgages (11% of GDP) and auto segments should partly offset slowdown in unsecured loans and offer enough growth headroom ahead.

MSME loans – a secular growth runway built on improving data availability and rising number of new-to-credit MSMEs

India has ~63 mn MSMEs, of which only ~40% have ever availed formal credit. MSME financing gap is of around US$250 bn, vis-à-vis the current outstanding of US$320 bn. Although banks’ MSME loans have grown at mid-teens over the past few years, analysts at IIFL Capital Services expect this growth to hold steady, driven by improving penetration, digital public infrastructure for financial information and as the lenders shift away from collateral-based lending to cashflow-based lending.