Kotak: Loan growth outlook to remain weak; expect 14% CAGR growth

Moneylife Digital Team 02 November 2012

Kotak doesn’t think that the banking sector would perform well as economic headwinds still remain while non performing assets (NPAs) are on the rise

Kotak Institutional Equities (Kotak) has sounded a cautious tone, in its latest note to institutional clients, with respect to loan growth and bank lending. It believes that loan growth will slow down to 14% CAGR for the period FY12 to FY14. So far the loan growth has been nearly flat, growing at just 4% for the year till date. Sanctions for the first quarter of the 2013 fiscal have declined to Rs26,800 crore, far less than the Rs67,700 crore they lent to business during the same period last year. Only 80 projects have been sanctioned for first quarter of the current fiscal, compared to 154 which were sanctioned for the same period last year. A total of 668 projects were sanctioned for FY12.

One of the key reasons for the lower credit offtake is the growing concern for non performing assets, especially amongst public sector banks. They’ve been forced to introspect and be cautious while lending. Much of what had been lent during the last decade is being unraveled only now. For instance, take Kingfisher’s case. We have other state utilities such as MTNL, Air India which are in dire need of a turnaround and are begging for cash. All this negative sentiment and concerns have spilled over.

Click here to read our cover story on public sector banks and why they are in such a sorry state. According to Kotak, banks are finding it difficult to identify new projects to lend due to the following reasons:

1) High interest rates. The Reserve Bank of India (RBI) has kept key interest rates unchanged

2) Weak economic and political environment

3) Leverage balance sheets of companies

It is pertinent to note that RBI has been doing a sloppy job of controlling inflation. While most investors had expected it to cut interest rates, the RBI Governor refused to and has kept a hawkish stance until inflation moderates to realistic levels. Secondly, it is no surprise that most balance sheets are over-leveraged, especially real estate (in 2009, credit offtake grew by 48.4%; now it is just 6.8%) and infrastructure companies. In fact, infrastructure credit growth has slowed down, indicating that roads, airports, etc will take time to complete. Economic growth depends on the availability of infrastructure.

A slower economic growth means that companies are postponing expansion plans as demand has slackened. In other words, banks lend to companies for capital expenditure and these plans have been either postponed or shelved, with very few still going on. If, however, the government’s sanctioning of SEB (state electricity board) reforms does go through, if implemented in the current form, it could make things a lot worse, because banks will be forced to lend (even if they’ve been guaranteed by the state), and risk running losses. Kotak finds that power sector forms 45% of the total capex, and this is by no means a small number. But at the end of the day, the efficacy of the money lent would depends on smart execution by power projects and state electricity board (which are nearly bankrupt)

Credit growth is one of the metrics to measure the economic activity of a country. A higher credit growth means banks are willing to lend to businesses which in turn will create more jobs and who in turn will create more tax revenues for the government. All this leads to a healthy economy. In the face of slowing credit growth, the RBI has reduced cash reserve ratio (CRR) in an attempt to let banks lend more. It has, however, kept key interest rates intact.

Comments