Category: Banking & Finance

Private sector banks recorded higher loan growth compared to other bank groups (PSBs and foreign banks), with their share in total credit steadily increasing to 35.4 per cent in March 2021 from 20.8 per cent in March 2015, according to Reserve Bank of India (RBI).

This has been at the cost of public sector banks, whose share in total credit has come down from 71.6 per cent to 56.5 per cent over the same period, said the central bank.

As of March-end 2021, foreign banks had a 4 per cent market share (4.9 as of March-end 2015); regional rural banks (3.1 per cent vs 2.6 per cent); and small finance banks/ SFBs (1 per cent). SFBs became operational from 2016 onwards. At the end of March 2021, gross outstanding credit of scheduled commercial banks (SCBs) amounted ₹1,10,78,050 crore (₹68,78,400 crore as of March-end 2015).

Personal loans shine

According to the ‘Basic Statistical Return on Credit by Scheduled Commercial Banks in India’, personal loans continued to grow at a robust pace over the last decade, and their share in outstanding bank credit increasing to 25.9 per cent in March 2021 from 16.4 per cent 10 years ago.

These loans recorded double-digit growth in all the years during the interregnum. The share of personal loans in total credit stood at 24 per cent in March 2020.

The RBI said that as the number of small-sized loan accounts with banks has been increasing over the years to meet personal loan and other requirements of smaller borrowers, the average size of bank loan account has gradually declined to ₹3.7 lakh in March 2021 from ₹4.8 lakh in March 2015.

The decline in the average loan size in metropolitan branches of banks has been sharper from ₹13.5 lakh to ₹7.7 lakh over the same period.

Industrial loans

Industrial loan growth, which has been decelerating during the last decade, turned negative for the first time during 2020-21 as economic activity slowed down in the aftermath of the Covid pandemic, said the RBI. Working capital loans in the form of cash credit, overdraft and demand loans, which accounted for a third of total credit, contracted during 2020-21, said the central bank.

Working capital loans accounted for 31.9 per cent of outstanding credit of SCBs as of March-end 2021.

Interest rates on bank loans declined further during 2020-21; the share of loans bearing less than 9 per cent interest rate was 60.7 per cent in March 2021 vis-a-vis 42.1 per cent in March 2020 and only 16.4 per cent in March 2019, said the RBI.

Credit utilisation in southern region of the country has been rising continuously, and its share in total credit increased to 30.1 per cent in March 2021 from 27.5 per cent five years earlier; it surpassed the western region, where credit share declined from 32.4 per cent to 28.8 per cent over this period.

Max Life Insurance (MLI) has sought insurance regulator IRDAI’s approval to set up a subsidiary to undertake pension fund management business, said Prashant Tripathy, Managing Director & CEO.

Pension regulator PFRDA had recently granted approval to MLI to become a sponsor of a pension fund manager.

“Our foray into pension fund management business is part of our aspiration to become a prominent player in the retirement space. This fits into that overall strategy. This is another extension of our fund management play. It is not for the next one year. It is really a macro view of how the pension sector will evolve in the next 10 years. It shouldn’t be seen as business of tomorrow, but as a business of the next decade,” he said.

Initial capital

Tripathy said he expects the IRDAI approval to set up the dedicated subsidiary in the next few weeks and that MLI will initially put in an initial capital of ₹50 crore, the minimum capital stipulated in the regulatory norms.

“We have written to the IRDAI to seek their approval. For any entity to be a subsidiary, you need approval of regulator and it is going to be subsidiary of Max Life Insurance. There are precedents where the regulator has allowed these entities to be created as part of life insurance, and we will create this subsidiary as part of life insurance.

“Over the next 5-6 months, we will set it up with independent entity, board, governance etc. We are now kickstarting the process,” he said. MLI Pension Fund – based on current preliminary estimates – aims to manage ₹10,000-crore Assets Under Management (AUM) within five years from the launch of the pension fund management company.

Growth of NPS

Currently, there are eight PFRDA-approved pension fund managers in India. Tripathy highlighted the robust growth in National Pension System (NPS), which has exceeded ₹6.5-lakh crore and growing at a CAGR of 35 per cent.

“NPS has seen good traction and it is becoming chunky. Pension, as a category, is going to be very large and managing the funds and being clued on to the ecosystem of PFRDA is also important to be able to become a prominent player in this retirement space. Fund Management is core to our business, and we just crossed AUM of ₹1-lakh crore on the retail front,” he said.

To encourage wider participation, the PFRDA has also given incentives for private participants in this space, giving more flexibility on fees that was low till recently, said Tripathy.

“We have capability, we have the mandate to operate in retirement space because we operate in annuity.

“We are the fourth-largest annuity provider among private players. It’s a part of looking at the entire value chain,” he said.

Noting that India’s pension assets to GDP is still low, Tripathy said that overall retirement space is going to grow. “Percentage of our people more than 60 years, it is 9.9 per cent in 2020. It was 7.8 per cent in 2010 and it will only increase by 300 basis points in 10 more years. There is a demographic shift and more and more people will be in retired,” he added.

“We have big plans in retirement space, and this is just an element in the impactful participation that we want to be in. Also from a branding perspective, if you are a retirement player, people do expect you to be present in the entire value chain. About two years ago we took licence of Annunity Service Provider (ASP) that PFRDA grants. We provide annuities. Now we got licence for pension fund management.”

‘Not a late entrant’

Tripathy also maintained that MLI was not a late entrant in pension fund management although eight other players are already in this space. “ Maybe I am late to the party. Party began only at 8 pm. But guess what ..the party will be there for the entire night…Retirement is going to be a big category for several players to thrive,” he said.

Overall, small banks accounted for 63% of the approximately $520 billion in loans through the federal Paycheck Protection Program launched in response to the pandemic. The program allowed small businesses to take loans that either could be forgiven or would have a 1% interest rate, according to the U.S. Small Business Administration

Increasing demands for new loans at higher interest rates could signal that small businesses are securing inventory and expanding, said Dave Ellison, a portfolio manager at Hennessy Funds.

“It seems like everybody else has benefited from the economy reopening but the banks because you’ve seen very little loan growth” on account of the Paycheck Protection Program, Ellison said. “The pandemic has disproportionably hurt small businesses, and those are the customers of regional banks,” he said.

As of June 30th, small banks held 15% of total banking industry loans but an outsized share of Paycheck Protection Program loans, holding 31%, according to the Federal Deposit Insurance Corp.

Overall, commercial loan growth fell 12% in September from a year earlier after bottoming out with a 16.3%% decline in annual loan growth in May, according to data from the Federal Reserve and Oppenheimer. Yet rising inventories at auto suppliers and retailers should bolster loan growth in the year ahead, said Chris Kotowski, an analyst at Oppenheimer.

“It seems likely to us that the next significant move is up – not down – for the simple reason that it can’t possibly come down as much as it already has,” said Chris Kotowski, an analyst at Oppenheimer.

A healthy increase in new loans at regional banks would be a strong signal that supply chain issues are moderating, said Steven Comery, an analyst at Gabelli Funds.

“If clients can’t get products to market because of the supply chain they aren’t going to be borrowing to build their inventory,” he said. “If we see signals that supply chain issues aren’t going away then that’s going to impact earnings estimates through 2023.”

The four largest U.S. banks reported mixed loan growth when reporting their earnings results Oct. 14, with J&P Morgan said loans were up 5% compared to the prior year while Bank of America and Wells Fargo reported declines.

Companies including First Community Bancshares Inc, First Midwest Bancorp Inc, and Zions Bancorp are expected to report earnings on Monday, while Fifth Third Bancorp O> and United Community Banks Inc are among those expected to report on Tuesday.

On Wednesday, Oct. 13, shares of First Republic Bank gained 1.5% after the regional bank originated approximately $15 billion in new loans and reported that its average Paycheck Protection Program loan balance was down 39% over the quarter. Those gains in new loans will make it likely that the bank will raise its guidance in the coming quarters, noted Casey Haire, an analyst at Jefferies.

Concerns over loan growth by regional banks comes at a time when the sector’s shares are trading near record highs. Regional banks in the S&P 500 are up nearly 37% for the year to date and are just below the high they reached on Oct. 8, according to Refinitiv data.

Despite those gains, regional banks continue to look attractive based on valuations, Ellison said.

Regional banks in the S&P 500 trade at a forward price to earnings ratio of 13.5, well below the 21.2 of the broad S&P 500, according to Refinitiv data. Valuations will likely rise alongside the yield of the benchmark 10-year Treasury, which is used to set rates for loans including mortgages, Ellison said.

“Valuation is not a problem for future gains,” he said.