Banks' risk aversion causing severe credit squeeze; brokerages pick these names for investment

Banks have still not come out of the corporate NPA mess and are wary of any new exposure, say experts

Published: Jan 9, 2020
Banks' risk aversion causing severe credit squeeze; brokerages pick these names for investment Image: Shutterstock

The credit squeeze in the Indian financial space, one of the main reasons for the worrying state of the economy, may take longer to go away as banks are risk-averse, say top brokerages.

Global brokerage firm Macquarie, in a report on January 7, said credit growth at 7 percent is at multi-year low, excluding the one-off demonetisation phase, and the main problem is that banks don't want to lend.

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Also, corporate-heavy banks such as ICICI Bank and Axis Bank are largely lending to the companies rated A and above, which is seen as an attempt to avoid default.

"Latest data from two corporate-heavy banks, ICICI and Axis, which funded a substantial part of their capex cycle last decade, clearly reveals that nearly 90 percent of incremental lending in the last couple of years has been to the corporates rated A and above," said Macquarie.

The risk-aversion of Indian banks has aggravated concerns about the revival of capex and infra cycle and the recovery of credit growth.

Why are banks not lending?

"Having burnt their fingers in the past, banks have turned extra cautious in a weak environment. Adding to it, the project pipeline is sparse too," said Mona Khetan, banking analyst at Reliance Securities.

Raghav Garg, CFA-Research Analyst, NBFCs and Specialty Finance at Nirmal Bang agrees.

"Likely reasons for this could be the current consumption and overall economic slowdown, which could potentially throw up asset-quality challenges later. Also, banks have been averse to lending to NBFCs because of the IL&FS episode as well as defaults by some prominent NBFCs and HFCs in recent times," said Garg.

It has been more than a year since IL&FS defaulted, followed by DHFL, ADAG, Zee Enterprise and others but there is very little progress on the resolution of these accounts. This has created uneasy among corporate lenders.

Banks have still not come out of the corporate NPA mess and clearly are cautious about new corporate exposures.

Asutosh Mishra, Head, Institutional Equity, Ashika Stock Broking, says the deleveraging of the corporate balance sheet has not been completed and thus there is an issue of availability of long-term equity from the corporate side also.

RBI's 'large exposure framework' is also a reason for slow credit growth, as it limits a bank to lend to an entity more than 25 percent of its Tier 1 capital, Mishra pointed out.

"Further, in our assessment revival of the capex cycle is still not started as consumption (public/private) is significantly low and thus capacity utilization across the industry is relatively low. In our view, the credit growth is likely to boost with public and private consumption improving first. It may later translate into higher capex requirement," said Mishra.

What can be done?

Experts say the government will have to take measures to boost consumption, which will raise the demand for the capital and push the banks to lend more. All this will eventually ease the liquidity squeeze.

"The government could take measures to increase consumption, which will in turn aid capex. Banks will eventually lend if there is enough demand for loans, which itself seems to be a problem at the current juncture," Khetan of Reliance Securities said.

To minimise the risk, banks can also focus on quality collateral and focus on cash-flow based lending.

"In the current environment, one of the ways to minimise risk is to focus on lending which is secured by good-quality collateral. Another focus area should be cash-flow based lending, which gives a better idea of the borrower's loan-servicing capability," Garg of Nirmal Bang said.

Experts and brokerages are optimistic that the scenario will change as a lot of groundwork has been done to address the issue and things will start improving.

Stocks to focus

For the investment, top brokerages advise going for quality names from the banking space.

"HDFC Bank and ICICI Bank remain our top picks. We won't be buying any PSU banks. HDFC Bank's recent trading update reveals that quality private sector banks continue to outperform and gain market share," said Macquarie.

As per Credit Suisse, the third quarter will start to reflect the slowdown in loan growth momentum, with the banking sector loan growth down to 7 percent YoY. Credit Suisse expects banks to lower their growth guidance.

"Q3 should witness one of the highest recoveries driven by Essar Steel (will also aid PSU bank NIMs). However, corporate slippages and provisioning will also move up, on the back of RBI reported divergences and accounts like Dewan," Credit Suisse said.

"We expect IndusInd Bank and HDFC Bank to report the strongest growth (nearly 20 percent YoY). Reported profits at HDFC Ltd will jump 4 times, on account of the revaluation of Gruh's stake. We continue to prefer private banks, with ICICI Bank, HDFC Bank, Axis Bank and IndusInd Bank remaining our top picks," it said.

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