The two private sector lenders had earlier burnt their fingers by lending aggressively to the corporate sector, before diversifying. With legacy corporate loans being cleaned up, these banks are now more keen to increase such advances, albeit gradually.
Prashant Kumar, managing director and chief executive of Yes Bank, explained that while new loans have been disbursed over the past few months, legacy corporate loans also had been repaid at the same time, which resulted in lower corporate loan growth.
The bank’s corporate loans increased 5.9% at the end of March, compared with a drop over the past three years. With the existing book being run down, the bank hopes corporate loan growth will pick up.
“As guided earlier, we expect that within advances, the ratio of retail + SME (small and medium enterprises) segment advances to wholesale segment advances (mid-corporate and large corporate) would remain at the similar level of 62:38 from here on over the near-to-medium term,” Kumar said on a call with analysts.
“Within advances, while we would continue to drive a steadfast growth in the SME and mid-corporate segment and further enhance our focus on profitability improvement within retail, we would expect corporate advances segment to grow in high single digits.”
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During founder Rana Kapoor’s tenure four years ago, Yes Bank used to give 60% of its loans to companies. After the Reserve Bank of India superseded the bank’s board in March 2020 and put in place a reconstruction or amalgamation scheme, the lender’s loan book diversified to more retail and small business loans.
For IDFC First, a healthy mix
IDFC First Bank too is looking at a healthy mix of retail and corporate loans, which currently stand at 83:17.
Almost 90% of its loan book was focussed on corporate lending and infrastructure financing five years ago, when IDFC Bank and Capital First announced a merger to form IDFC First Bank.
However, the bank made a conscientious decision to reduce its corporate loan exposure because it had turned bad after the merger. Over the years, the bank’s corporate loan exposure reduced, falling to 17% at the end of March.
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“With commodity cycle recovering from their recent lows, we expect working capital needs of both manufacturers and trading service providers to grow over FY25,” said Paritosh Mathur, wholesale banking head, IDFC First Bank. “We had credit costs in the last cycle in corporate banking, so we have conservative credit risk exposure norms and look at cash flows closely.”
Mathur added that the IDFC First’s cost of funds had reduced over the past years, relative to that of its peers. “Therefore it enables us to lend to a much larger universe of corporate clients as compared to, say, five years back,” Mathur said.
That said, both IDFC First Bank and Yes Bank have a high cost of funds as compared with that of other banks, at around 6.5%. Including their capital requirements, it could be even higher. This could restrict their lending to AAA-rated companies, which typically command better pricing.
Higher slippage, muted demand
RBI’s November direction to increase the risk weights on unsecured loans could also be why Yes Bank and IDFC First Bank see corporate loan growth as an opportunity.
There has been a spike in slippages—the rate at which loans turn bad—in Yes Bank’s unsecured retail portfolio over the past few quarters. According to the bank, the impact of the increase in risk weights has been nearly 40 basis points, which was fully offset by organic core equity capital accretion, including profits of almost 50 basis points.
IDFC First Bank took a 1% hit on capital due to the increased risk weights on consumer loans. The bank recently raised ₹3,200 crore via a preferential allotment to fund growth while factoring in the new risk weights.
IDFC First plans to grow its newly launched products, such as credit cards, gold loans, tractor loans, car financing, and affordable housing, strongly.
However, India Ratings said in its latest release that demand for credit from companies with capital expenditure plans will remain muted, driven by strong cash flows, the modular nature of investments, and the flexibility to tap the equity markets.
“Consequently, financial leverage is likely to remain muted and a meaningful increase in the credit requirements of banks/capital markets will be largely driven by movements in working capital cycles and/or potential inorganic opportunities,” India Ratings said. “This could keep credit spreads tighter than historical levels.”
