According to a top bank executive, Kotak Mahindra Bank will witness 15-20 percent growth in the corporate banking and SME portfolio.
With the banking sector struggling with challenges from GST implementation and the residual impact of demonetisation, Kotak Mahindra Bank, one of the fastest growing private sector lenders, has been focusing on new customers in the last six months to build its book.
"The primary driver for growth is more the new customers and not so much from old or existing customers, which tells a story that the existing customers' requirement for capex or loans for financing their growth, that piece has not grown much," the bank’s Business Head for Corporate Banking and SME (small and medium enterprises), Manish Kothari told Moneycontrol News in an interaction. "Existing customers have seen mild growth but a large part of growth is coming from new customers."
The focus means that despite the challenges, the bank will witness 15-20 percent growth in the corporate banking and SME portfolio -- even higher if the challenges move away faster.
Kothari said that companies had not seen any new capacities being built up. "(It is) happening in pockets for sure; say the auto sector, which is seeing some expansion; chemical industry is seeing investments in capex; roads, with NHAI coming out with bids; lot of new projects being given in renewables in the solar space."
He added that a pickup in investments by corporates was perhaps still 6-12 months away.
Low loan demand from corporates has been the case for about more than a year now -- loan growth touched a multi-decade low of 4.1 percent in the month of May 2017.
Moreover, the Goods and Services Tax or the GST that got implemented from July 1 last year, has seen taxpayers struggling with teething problems such as delay in input credit refunds, lack of clarity on filing, errors in invoice matching and few other technical snags.
Additionally, there is also some degree of disintermediation which has happened. "So the better quality corporates have raised money from the money market, instead of bank funds," Kothari said.
Kothari, who joined Kotak 22 years ago straight after finishing from the XLRI business school, expects the bank to keep performing better than many of its peers.
He expects that with the initial GST hiccups waning, and also with the resolution of the non-performing assets (NPAs) eventually coming in with the NCLT proceedings, corporates will make a comeback. "(They will) expand capacities as better companies and players with more equity such comapnies. Those (distressed) companies are not operating at optimum levels,” the Kotak executive said.
Kotak bank’s standalone corporate and business banking (which includes SME) together contribute 32 and 12 percent, respectively. The total corporate portfolio as on September 30, 2017, stands at nearly Rs 49,000 crore while business banking book is just above Rs 18,100 crore.
This, for the corporate book, was a growth of 26.4 percent from a year ago period and a one-digit 6.4 percent over the June quarter.
However, business banking portfolio suffered as it grew by a meagre 4.3 percent from September 2016 and 3.4 percent from the June quarter 2017.
"Delinquency rates in ABS (asset backed securities) deals backed by loans against property to SMEs will increase in 2018, because of the tougher operating environment for SMEs. The introduction of a GST in July 2017 and the government's demonetisation policy have placed stress on the SME sector," said Dipanshu Rustagi, assistant vice president at Moody's, said in a report by Moody’s and ICRA on Monday.
However, like the government and many others, Kothari sees a fat silver lining with more organised players coming into the system with GST streamlining the processes in the next 12 months.
“Those in the organised sector are happy that the demand or business from a host of unorganised people is shifting to them. There is lesser of cash economy now than before and the differentiation is much more on who followed good practices who are getting stronger and those cutting corners face difficulties managing cash flows,” he said, adding that people who align to the change faster will be in a better shape.
Kothari is not worried even if a majority of India’s economy is thriving on the unorganised segment.
According to him, “Some mortalities will happen, (but) we cannot underestimate the power of entrepreneurship and they will come back into the business. The pain point is more with respect to the refund process taking longer because the reconciliation takes time and the system is new, so the cash flow cycle has to become faster, which will (happen).”Kothari adds that the challenge is only in the last mile where the cash element is the highest. “Because he doesn’t need credit inputs but there is benefit that he also doesn’t add much value to the taxes.”