Credit environment has never looked better for KVS Manian, Corporate, Institutional and Chairman investment banking Kotak Mahindra Bank said on Wednesday. But the demand from corporate borrowers is still not very strong, he said.
Indian corporations have significantly depleted their balance sheets over the years by raising equity and refinancing high-cost debt. This has opened up opportunities for banks, which have seen growth in recent years mostly from retail lending.
Bank credit grew 19% year-on-year during the fortnight ended October 20, according to reserve Bank of India Information
Sector-wise data available till September shows credit to industries grew 12.6% year-on-year, with small and medium-sized corporates reporting strong growth.
“We are seeing opportunities in sectors like cement, steel, renewable energy, roads and chemicals. These five sectors have some capacity building and hence there is demand for credit,” Manian said.
“We are yet to see a secular increase in credit demand across sectors.”
Lending to small and medium-sized businesses, however, has been aided by the government’s emergency credit guarantee scheme launched during the COVID-19 crisis, which helped stabilize the sector.
Kotak Mahindra Bank took a loan of 140 billion rupees ($ 1.69 billion) under this scheme with low defaults.
wrong price risk
Banks in India are required to lend a certain percentage of their overall advances to priority sectors such as agriculture and small businesses.
But, Manian cautioned that corporate loans can be misvalued as a large number of banks pursue few opportunities.
“We feel that the market is not valuing the credit risk and the cost of priority sector lending in pricing corporate advances as well.”
This, he explained, means that even a small company, to which lending can be risky, is able to borrow at a cost close to those associated with relatively high-rated corporates.
To avoid this, Kotak has expanded its corporate credit book by investing in “credit options” such as commercial paper, bonds and non-convertible debentures issued by companies. It has invested Rs 273 billion in such equipment.
“While credit options carry mark-to-market risk, we see any MTM losses because we hold most securities until maturity.”
deposit fight
Like most other lenders, Kotak is also focusing on growing deposits, which are growing at a slower pace than credit.
“Deposits will again be in fashion as banks increase deposit rates, especially on fixed deposits,” Maniyan said.
“This will mean that the cost of funds will go up and the ratio of low cost deposits (current and savings accounts) will look weak as more money will come in fixed deposits.”
However, Manion does not necessarily think that this affects the lending margin of the bank as a larger proportion of assets are being revalued than liabilities.