Loan growth faster than nominal GDP over 5-10 yr

Vishal Goyal, Head of Research, UBS Securities, says NBFCs which are purely or mostly doing unsecured lending, are the most impacted as would be some banks which are unsecured and who have just entered unsecured and because their own cost of funding constraints might have taken additional risk. Then there is a category of large banks or top banks. They have historically been doing this business and have been taking less risk, even within unsecured. They would largely be unimpacted from a credit loss point of view. But almost everywhere we would see a slowdown.”

You analyse this space pretty closely and RBI did kind of drop hints in multiple platforms about the way unsecured, especially consumer loans were growing at a very scorching pace and now they have moved. How much capital requirement or slowdown in the growth these names would have to see before they normalise?

One, there is a direct impact on tier one which we estimate would be anywhere between 30 to 50 bps depending upon which bank we are talking about. Second, there is an indirect impact of increasing risk weights on lending to NBFCs which increases the cost of borrowing for NBFCs effectively and therefore, it will also have an indirect slowdown impact on overall consumer loans.

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In the last four-five years, this segment actually has grown at around 27 to 30% CAGR roughly for the system. Now, with increasing lending rates, we feel that they should slow down a bit. Now, if you assume a 5% slowdown of this segment, that would mean a 50 bps slowdown for the system credit growth, considering this is now becoming around 8- 9% of the system credit.

Is this like a canary in a coal mine because the Reserve Bank of India has access to more data than what perhaps you and me have? Is this more like a profit warning by the Reserve Bank of India saying that guys go easy because we do not like the way you are lending?

Clearly, regulators seem to be ahead this time on this particular segment. As you rightly said, they probably are seeing more data. Some data we have also highlighted in our last report which increasingly shows that the new dispersals are increasingly going to weaker borrowers and that probably could be a warning sign, which even RBI has seen. While if you look at purely the delinquency data, it is not suggesting huge alarm, probably helped by the increasing denominator.

From a market standpoint, do you think we can categorise the financial pockets into two banks and NBFCs which have a high unsecured loan book. Those with high unsecured loan books have been growing higher than industry because of their growth in unsecured loan books. Has that bucket now become the bucket you want to avoid?

Yes, I think and that is what is our call as well. You would see three types of players in this segment? One, the NBFCs which are purely or mostly doing unsecured lending. They are the most impacted. Then we would have some banks who are unsecured and who have just entered unsecured and because their own cost of funding constraints might have taken additional risk.

So these two segments would be more impacted. And then there is a category of large banks or top banks which also we have categorised. They have historically been doing this business and have been taking less risk, even within unsecured. They would largely be unimpacted from a credit loss point of view. But almost everywhere we would see a slowdown.

What is the net aggregate impact according to you because almost everybody is taking it for granted that the system growth would be anywhere between 13% and 15%. Are we looking at say 1-1.5% getting knocked off at the industry level?

Our current estimates are baking that in as well. If you look at the last reported data, it is almost 15.9% YoY loan growth. We are working with more than 14% loan growth for this year and which would also slow down another 100 bps or so next year. We are building in some slowdown in this segment.

What is the view on net interest margins (NIMs) which were already in a consolidation phase and banks were adjusting for high interest rate deposits. What are you expecting from the net interest margins going forward because the unsecured loan growth will likely get impacted?

So, there is this positive loan mix effect of unsecured which has also helped overall banking NIMs going up. So, the positive impact would slow down. I do not think unsecured would grow less than industry growth rates. So, to that extent, I do not think there is a negative impact, but all the positive effects of improving loan mix will stop to come through to NIMs. There are other forces right now which is, for example, rising cost of fund due to rising TD rates or repricing of TDs, that is still is not fully captured in the margins plus the declining CASA ratio which is started since March 22 with the rate cycle that is also in a way eating away margins. Those two factors might be slightly more powerful while I agree that the positive effects of unsecuredness are also likely moderate.

Going forward, what is your take on the credit cycle because there is one pocket of the NBFCs which are guiding higher for growth because they are actually catering to that part of the economy which does not have access to capital. Yes, it is definitely risky and even SBI, on Friday, sounded very confident of 13-14% growth. How will you balance out both the parts?

We are not worried about systemic risks or even systemic cycle wise because, if you look at the last 10-20 years, bigger problems have come from corporate cycles just because of chunky nature and again the regulator has acted much faster in unsecured cases. So we are not expecting a big cycle of NPL or credit losses which will slow down the system.

It is just that the new pockets of growth are unsecured and that would slow down and that would lead to an overall slowdown in loan growth. We need to see a decisive pickup in the capex story. So, compared to the previous cycle, we are not seeing long gestation projects or projects which are extremely capital intensive. We are generally seeing light capital projects being taken up. Some capex demand will add to credit growth and that would continue to generally support.

The whole deleveraging cycle seems behind us and that is also leading to slightly better growth numbers now. Our view is that given India’s credit penetration, given where we are in terms of long-term cycle, loan growth should be faster than the nominal GDP growth over a 5-10-year period and we are again in the right spot purely from a deleveraging point of view as well.

If the unsecured or the personal loan category slows down, do you think the NIMs also will be affected because this is one category where in a sense, one is taking a higher risk but your spreads are always the highest.

Majority of the banks have seen NIMs expansion in the last four-five years and the unsecured segment has contributed to that. The mix change has been positive so far. I do not think the mix change is turning negative. It will be neutral. For example, unsecured may grow at 15-20% and the system will grow at 13-15%. So, it is slowing down from 30% to more like 15-20%, still faster than the industry. I feel that NIMs would be driven more by other factors than the loan mix and the positive effect of loan mix will not be very minimal.

In the last one-and-a-half years, we have seen a steady uptick in interest rates. That up cycle is behind us. We have seen a steady decline in credit cost for the system. We have seen a steady decline in terms of where the NPA cycle has moved. So, in the next 12 to 18 months, what kind of scenario do you think we are in?

If I were to break it into a five-seven-year cycle, we are still in the positive cycle for banks with no major risk on credit losses. The points we are trying to highlight are versus expectations because what lowest credit cost is already in the expectations, in the numbers consensus estimates as well. High NIMs are also being already reported and therefore are also part of expectations.

There would be some disappointment on both this leg, that is what I think we are highlighting and therefore, there is a mismatch in expectations versus what actually we might see. A steady ROA expansion has happened in the last four-five years due to the factors which you just mentioned. We feel that we are probably closer to that expansion, like the peak of expansion and now we should start seeing some contraction due to NIMs stagnating or declining and credit cost already bottoming. Now, we would only see some increases in credit cost towards the average.

Roy Walsh

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