Overleveraging, that is, multiple loans being given to the same person, is being seen in the system, said Macquarie Capital’s Suresh Ganapathy in an interview with Moneycontrol. “And this proportion has increased significantly over the last two years. There is some element of stress in the system that we need to be mindful of,” he said.
Ganapathy has been tracking the financial services sector for over two decades now. He believes if any of the unsecured lending done as of today starts to unravel, fintechs and the lower-rated NBFCs will see the maximum impact. Edited excerpts. (Read part 1 here.)
Apart from the boom in unsecured lending and personal loans, what have been the other big triggers for the banking industry in the past year? Going ahead, what will be the new triggers?
I think retail and secured mortgages will continue to be the mainstay of the banking system. Now, unsecured loan growth is expected to come down over the next 12 to 18 months, because that's what the Reserve Bank of India (RBI) wants. Banks’ exposure to NBFCs will also come down. This will be offset by mortgages, which will still be decent, steady, and healthy. SME lending will also pick up, and private sector banks have been gaining market share in this segment. And we are hoping that private sector capex picks up a little bit. Right now, we are in election mode. Maybe post-elections, in the second half of FY25, some extra pick-up can happen in the capacity utilisation level, which currently stands at 80 percent. So, in our view, that's where the opportunity is.
And I should emphasise that corporate lending will not pick up in a big way because the capex cycle takes time to flow through. First come the sanctions, and then disbursements happen in stages, depending on the project execution phases. So, it will not be a big immediate trigger. But it will pick up gradually over the next two years.
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What is your view on the caution around unsecured lending? Do you see any asset quality problems cropping up?
Marginal, but not a problem for the large players. The bigger problem, obviously, would be because the Reserve Bank of India wants growth in unsecured lending to come down. So we will not necessarily see credit costs going up because of the personal loan issue, but growth will definitely come down in the near-to-medium term.
You cover Paytm as well. Are you still bullish on the stock? They want to target higher-ticket loans, but why would someone go to Paytm and not directly to a bank?
It is just another distributor at the end of the day, right? Paytm, at the end of the day, will depend on a bank or NBFC to give the loan. And one of the problems banks have is that they are still a bit weak when it comes to technology, and the ease of product offerings takes time.
For example, if you are a PSU bank customer, you may have a good credit score, but getting a loan from the bank could be a nightmare. Paytm can facilitate that, with a marginally higher rate. For Paytm, this is just another market opportunity that only time will tell whether they're able to execute well or not.
Banks have their own branches and sales force, yet they rely on third-party agents such as Andromeda, who goes and sources loans. It is because they have a better reach and a better network presence in that particular market. Just like Paisabazaar and Andromeda, Paytm also becomes another distributor in the overall scheme of things.
Also Read: HDFC Bank faces tough task to deliver both on margins and costs: Suresh Ganapathy of Macquarie
So you are bullish on the stock and its prospects, is it?
No, not in the near term. We do believe that there will be more earnings cuts and more revenue-related cuts for Paytm because of the RBI rules and regulations on unsecured loans.
Since you are talking about the RBI regulations, do you see the evergreening of loans happening in the system? That is, people taking out more loans to pay off their previous loans.
The TransUnion CIBIL data very clearly shows that some overleveraging (i.e., multiple loans being given to the same individual) is happening in the system. A person with a personal loan also has three other loans. And this proportion has increased significantly over the last two years. There is some element of stress in the system that we need to be mindful of. So this will have a corresponding implication from a growth perspective, in our view.
If the unsecured lending done as of today starts to unravel, fintechs and the lower-rated NBFCs will see the maximum impact.
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What will it take for HDFC Bank to re-rate? It has disappointed the street with its numbers yet again.
It will rerate only when the net interest margin starts improving. The market needs to understand that margin improvement will be a function of how good your deposit mobilisation is, how you are able to reprice on the assets' front, move more towards retail deposits, and within that, towards higher-yielding retail to drive the margins.
Deposit growth for HDFC Bank is good — better than other players — but it does not match up to the needs of the merger. CASA deposits are going down, term deposits are going up, and all these are affecting margins.
I think margin improvement is most likely to happen from Q2 FY25 onwards.
Your broad sense of how system credit growth is placed...
Credit growth is currently around 15–16 percent. This will come down to 13–13.5 percent over the next year. This is because almost 40–50 percent of the incremental credit growth in the last 12 to 18 months has come from unsecured loans and loans to NBFCs. With RBI putting restrictions in place, we can see a 100–200 basis point (bps) decline in credit growth over the next 12 to 18 months.
We have already downgraded the NBFC sector — Bajaj Finance, Cholamandalam Finance, and SBI Cards.
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You don’t think NBFCs can bridge the funding gap from bond markets, do you?
It will take a long time. Almost 50 percent of the NBFCs' funding comes from banks. That cannot be entirely replaced. Banks’ lending to NBFCs is growing at 30 percent. We believe it will slow down to sub-20 percent in a year.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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