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Smaller private banks look for recession-proof assets to cut COVID risks

Pandemic concerns have heightened the caution among smaller private banks. To avoid risky bets, these banks are now focusing on retail loans with a special focus on gold.

May 13, 2021 / 07:42 AM IST
CSB Bank has said it has increased its share of gold loans to 40 percent in the March quarter and wants to grow it big going ahead as well.

CSB Bank has said it has increased its share of gold loans to 40 percent in the March quarter and wants to grow it big going ahead as well.

The resurgence of COVID is forcing smaller commercial banks turn to recession-proof assets to avoid future asset quality shocks. These banks are taking cues from bigger lenders which have already shifted focus more towards less-risky retail assets. The smaller ones, more susceptible to pandemic shocks, are discouraging their officials from sanctioning fresh loans to sectors that are directly hit by the pandemic, for instance hospitality and services.

What they find attractive is recession-proof sectors such as essential services, gold loans and other retail loans. The idea is to de-risk their portfolios at the earliest in the phase of continuing uncertainty on the COVID-front. There is a fear of nationwide lockdown soon as COVID cases are continuing to go up on a daily basis across the country. Already, most states have announced lockdowns, which have impacted businesses.

The RBI, on May 5, announced a second round of measures to help banks and stressed borrowers. This included special liquidity support to COVID health infra sectors and provision for another round of restructuring for smaller businesses.

Gold, a safe bet

When it comes to safer assets, gold loans are an important focus area for all banks. For instance, Dhanlaxmi Bank, one among the small-sized private banks in Kerala, grew its gold loan portfolio by 48.13 percent on a year-on-year basis during the fourth quarter. Sequentially, gold loan advances grew 5.6 percent. This growth is significant.

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Similarly, CSB Bank, one of the smaller private banks, has said it has increased its share of gold loans to 40 percent in the March quarter and wants to grow it big going ahead as well. “We see a lot of potential for gold loans. Currently, it contributes 40 percent of the portfolio. Our gold loan portfolio now stands at Rs 6,131 crore and we have seen a growth of 61 percent in this portfolio on a year-on-year basis. We will continue to focus on this segment,” CSB Bank MD &CEO, CVR Rajendran said.

Banks like gold because it is a safer asset and is backed by collateral. Further, banks do not expect much downside on the gold prices. According to RBI rules, banks can lend up to 75 percent of the gold value.

Similarly, other Kerala-based lender, Federal Bank, too, has focused more on retail assets to cut down risks in the face of pandemic. "Gold is a great product and a great hedge for bank and the customer because it is secured,” said Federal Bank MD &CEO, Shyam Srinivasan to Moneycontrol on March 19.

‘And customers are able to get a loan against that product, where with respect to other credit lines, banks were uncomfortable to do for six to eight months. Naturally, there was a massive focus on gold. We did remarkably well,” Srinivasan said.

Presently, gold loans constitute 11 percent and inching closer to 12.

Retail focus

While gold has always been a safe bet, the pandemic has forced banks to generally shift to retail loans from wholesale.

For instance, CSB has been de-risking its portfolio from wholesale loans and loans to service-industries will now only focus on safe lending as a precaution from. “Earlier, we were cleaning up the portfolio. Over a period, we exited some of the portfolios including loans to gold retailers and manufacturers, resorts and hotels, plantations, etc.,” Rajendran said.

“We now have identified certain segments to lend which are recession proof. For instance, we are focusing on gold loans. Food and food processing is another segment we like. There is a lot of focus on agriculture loans too,” said Rajendran.

The bank has decided to strictly stay away from risky unsecured loans to avoid any future impact on asset quality, Rajendran said. “We do not support unsecured businesses. We have stayed away from hotel and tourism, resorts, etc,”Rajendran said.

Similarly Federal Bank has been focusing on retail assets for long to cut down risks.  “Any bank that is built on a granular liability franchise is a good bank. You see our liability profile. In 2012, we de-bulked the book. If you look at our book in 2013, we stopped depending on bulk deposits. About 93-95 percent of the liability is retail now,” Srinivasan said.

COVID second wave has severely impacted the services sector, especially small restaurants and resorts are hit in a big way. With more states are now going to lockdown mode, small businesses are hit hard.

Pandemic Uncertainty 

According to an SBI research report, with the second wave and associated lockdowns/restrictions, an economic disruption is now clearly visible. At least 20 states are now in lockdown. The number of ratings downgrades are 3.7 times higher than upgrades in April 2021. "Our Business Activity Index, which has been declining steeply since April, has dipped to a new level of 71.7, the level attained in mid-Aug’20. The latest week shows dip in all indicators, except for weekly food arrival and electricity consumption,” the report said.

Further, the decline in labour participation is a matter of concern indicating that the disruption has percolated to the labour market as well. Even the monthly leading indicators, including GST e-way bills, vehicle sales, fertiliser sales have declined in Apr’21 compared to Mar’21, the report added.

Even big banks turn cautious...

It is not just smaller lenders, but even bigger private banks are trying to bring down their corporate book and focusing more on the retail portfolio. In the case of ICICI Bank, retail book grew by 20 percent year-on-year (YoY) and 7 percent sequentially during the quarter ending March 31, 2021.

Retail loans comprised 67 percent of the total loan portfolio at March 31, 2021. In the case of Axis, the retail loans grew 10 percent YoY (year-on-year) and 7 percent QoQ (quarter-on-quarter) and accounted for 54 percent of the net advances of the bank. Domestic retail loans grew 11 percent YoY and 7 percent QoQ. The share of secured loans was 81 percent with home loans comprising 36 percent of the retail book.

Retail disbursements touched new all-time highs led by higher contribution from secured loan segments. Disbursements in Consumer segment were up 45 percent YoY and 44 percent QoQ, with secured segments like home loans up 73 percent YoY and 45 percent QoQ, and LAP (loan against properties) was up 53 percent YoY and 51 percent QoQ.

Compared with this, HDFC Bank has grown its retail book at a slower pace. Its domestic retail loans grew by 6.7 percent and domestic wholesale loans grew by 21.7 percent. The domestic loan mix as per Basel 2 classification between retail and wholesale was 47:53.

Banks have also increased provisions to guard against any potential shocks associated with COVID. The expectation is that with the progress on vaccination, pandemic will be brought under control this year post a likely peak in cases in June-July, analysts said.

Moody’s Investors Service on May 11 slashed India’s growth forecast for the current financial year to 9.3 percent saying COVID second wave could impact economic recovery and increases risk of longer-term scarring.

“India is experiencing a severe second wave of coronavirus infections which will slow the near-term economic recovery and could weigh on longer-term growth dynamics," Moody's said.
Dinesh Unnikrishnan
first published: May 12, 2021 05:35 pm

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