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Categorized | Banks

India private-sector banks eye retail respite

Posted on October 5, 2016

Customers wait for their turn to withdraw cash from an ATM at the ICICI Bank Connaught Place branch in New Delhi, India, Wednesday, September 6, 2006. Photographer: Amit Bhargava/Bloomberg News.©Bloomberg

ICICI Bank and Axis Bank — the Indian private-sector lenders hit hardest by a surge in distressed corporate loans — are relying on buoyant retail lending and market share gains from state rivals to revive their flagging performance.

Defaults by borrowers in struggling industries, such as infrastructure and steel, have pushed up bad-loan ratios in India over the past year, raising concerns about the sector’s ability to support investment in the world’s fastest-growing major economy.

    Most of the pain has been felt by the dominant state-backed lenders. However, ICICI, the biggest private-sector bank by assets, has also been badly affected: the value of its non-performing loans rose 80 per cent in the year to March, to reach 5.3 per cent of assets. At Axis Bank, India’s third-biggest private bank, non-performing loans more than doubled in the same period, to 2.5 per cent of assets.

    In interviews last week with the Financial Times, the chief executives of both banks acknowledged the extent of the problem,
    with further defaults by some corporate clients likely, and credit demand in the wider business banking sector showing no sign of picking up.

    But Chanda Kochhar, chief executive of ICICI, said its ratio of non-performing loans could be reduced by strong credit growth from the retail sector.

    The larger growth is coming from consumers, who are still spending, still buying homes, cars, two-wheelers

    – Chanda Kochhar, ICICI chief executive

     “The larger growth is really coming from the consumer side”, she said, noting that individuals were “still spending, still buying homes, cars, two-wheelers”. In retail lending, ICICI recorded 22 per cent growth over the three months to June.

    Shikha Sharma, Axis chief executive, said the banking sector would rely on rising demand for retail and small business loans to drive growth for at least the next year. She attributed that trend to a big rise in first-time bank users, driven by new technology and a national biometric identification system that accelerates the sign-up process.

    Both of the chief executives’ remarks highlight a divergence noted by economists between India’s robust growth in consumption — helped by a wetter monsoon season and increases in public servant wages — and weak private investment that Nomura says shows “no sign of recovery”. Private consumption grew 6.7 per cent in the second quarter, according to the government, while fixed investment fell 3.1 per cent.

    Nevertheless, even in a sluggish environment for corporate borrowing, both Ms Kochhar and Ms Sharma argued that there were opportunities to take market share from the state-owned banks, where the overall non-performing loan ratio stood at 9.6 per cent at the end of March.

    India stressed assets

    “The opportunity is there for those banks who have the capital to grow, the distribution networks, and who have the efficiency through use of technology,” Ms Kochhar said.

    Some potential buyers of bad loans have complained that banks holding troubled assets are refusing to sell them at reasonable prices — implying a broader reluctance to take the appropriate writedowns on their books. Both chief executives disputed this claim, though.

    Ms Sharma said increasing the sales of distressed loans required a greater number of well-capitalised buyers — which are now starting to emerge in the market.

    In July, Canada’s Brookfield Asset Management announced a $1bn commitment to a fund that will invest in Indian distressed assets, four months after US private equity group JC Flowers announced a $100m joint venture with India’s Ambit Holdings for a similar purpose.