Concentration of bank loans to top borrowers on decline

Slowing economy, higher tier-i capital norms causing shift in focus to retail lending

Banks continue to shy away from giving loans to the corporate sector, and have confined themselves to retail banking, which has shown more resilience and is equally lucrative if not more. The fear of bad loans and stress in the corporate sector has dampened big-ticket lending. Most banks have shown a lower share of corporate loans on their books; and they now prefer to cherry-pick companies rather than bet on a sector or a group.

Banks continue to shy away from giving loans to the corporate sector owing to fears of their turning sour because of stress in firms, and have confined themselves to retail banking , which has shown more resilience and is as lucrative, if not more.

Most banks have shown a lower share of corporate loans on their books; and they now prefer to cherry-pick companies rather than bet on a sector or a group. Banks have diversified their risks when it comes to lending to their top 20 borrowers.

The Reserve Bank of India (RBI) issued a circular in June regarding risk diversification. In the circular, the RBI asked banks to make sure that they were not lending more than 20 per cent of their eligible capital to one borrower.

A thread running through corporate banking wings is a flight to safety, and a sharp reduction in concentration risk.

Experts say there are a number of reasons contributing to this slip in concentration risk. Banks are pursuing more granular growth. The trend of corporate lending has been dipping for the past four years.

Anil Gupta, ICRA’S sector head of financial sector rating , says: “Banks have reduced their lending to companies because of the slowdown in various sectors. They have focused more on retail lending and the requirement of Tier I capital has also been increased by the regulator. In March 2015, banks were supposed to maintain 7 per cent of Tier I capital and by March 2020 it will become 9.5 per cent.”

ICICI Bank’s loan exposure to top 20 borrowers has slipped by 250 basis points (bps) in the past three years. It stood at 13.3 per cent in FY16, 12.5 per cent in FY18, and 10.8 per cent in FY19.

In Axis Bank’s case, its exposure to top 20 single borrowers as a proportion of Tier I capital slipped 3,000 bps points in three years. It stood at 142 per cent in FY16 and slipped to 112 per cent in FY19.

For Federal Bank, the exposure to 20 largest borrowers as percentage of exposure slipped 689 bps in three years from 16.93 per cent in FY16 to 10.04 per cent in FY19.

Commenting on this growing trend, Sumit Kakkar, chief credit officer of Federal Bank, said: “We only lend to corporates that have a cash-flow history of more than one year and debt-servicing capabilities. We will not do any adventurous lending to high-risk borrowers. Demand for fresh capex from large companies is tepid and we are cautious about the infrastructure sector. Demand is largely for refinancing though small and medium enterprises.”

For State Bank of India (SBI), its exposure to 20 largest borrowers as percentage of its lending slipped by 308 bps in three years from 15.88 per cent in FY16 to 12.8 per cent in FY19.

However, SBI Chairman Rajnish Kumar is optimistic this situation will improve. “As utilisation in working capital limits improves, the performance on advances will also improve. The ratio of wholesale to retail could then again change to 58:42.”

He also added that “if they (other banks) stop l ending , I will expand in that space. It only means a bigger opportunity for me. There is still scope for SBI to lend in sectors such as roads, renewable energy, and oil and gas.”

Punjab National Bank (PNB) has also witnessed a decrease in domestic credit risk-weighted asset (RWA) density, which slipped by 1,616 bps in two years from 64.88 per cent in FY17 to 48.72 per cent in FY19. The data for FY16 was not available.

Every bank uses its own methodology to calculate concentration risk.

The data also suggests retail lending has taken the front seat in the loan book . At the end of September 2019, Axis Bank had 64 per cent of retail and smallenterprise loans whereas companies accounted for the remaining book . Similarly, for SBI, 60 per cent of the loan book comprised retail, agriculture, and micro, small and medium enterprises (MSMES). This part was under 50 per cent of the loan book two quarters ago. ICICI Bank’s loan b o ok is near p erfec t at 50:50, between retail and whole sale loans. Corporate loans account for about 48 per cent of HDFC Bank’s advances.

Some bankers say the resolution framework has also not been able to give lenders the much required confidence of opening their purse-strings for companies.