Banks are at risk of blowing up in 2-3 years as they chase unsecured credit from unbankable segments, says veteran investor Shankar Sharma. Sharma commented that the big banks are at a size where they need to take more risks to grow. “The Non-Performing Asset (NPA) number of HDFC Bank came out a while ago and we know what kind of reaction that elicited,” Sharma added.
HDFC Bank in its Q2 results, saw its GNPA/NNPA ratios increase marginally to 1.3 percent/0.4 percent due to its merger with HDFC.
Sharma pointed out that banks don’t want to lend to corporates making retail segments, the prime target. “Nobody wants to lend to the corporates. None of the private sector banks are interested in that. Everyone is chasing the retail loan segment. In that, the bankable retail loan is probably done and dusted. So you need to go to unbankable or moderately bankable which is the unsecured part and this has become a larger pie of incremental bank lending.”
Unsecured loans refer to credit cards, personal and microfinance loans. UBS Group had recently flagged the increasing risks in retail unsecured loans for banks. UBS analysts said that unsecured retail loans increase default risk for banks by 50-200 bps. Reserve Bank of India (RBI) recently raised concerns about a surge in unsecured credit growth and asked banks and non-banking financial companies (NBFC) to enhance their internal surveillance mechanisms.
Sharma said this risk-taking approach makes him uncomfortable as blowups have happened across banks worldwide due to unsecured lending. “We will be no exception. Mark my words. In 2 or 3 years, these same loans will come back to haunt these banks. I will be then around hopefully to pick these banks when the trade is closer to book value,” Sharma added.
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Sharma said despite being a fan of the Bajaj Group as they managed an unsecured loan book for a long period, he still has scepticism about how they handle the risk now. “I’ve considered them to be fantastic business people. They are very capital efficient and focused on the bottom line and generating cash flow. That said, when you reach a certain size, you will go off the risk spectrum. Earlier, Bajaj Finance could grow, because the pool of lendable assets was there. Maybe now they are getting close to the ceiling of that. We'll see. I hope they defy my scepticism.” Sharma said.
However, it seems like banks are unfazed by their growing unsecured loans. The largest public bank in India, State Bank of India (SBI) Chairman Dinesh Khara said they are not concerned with their unsecured loans during their September quarterly result announcement.
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