The rise in bad loans and subdued corporate demand is driving banks to explore new business models, cross-sell products with more retail-oriented segments for growth. They are stepping up credit monitoring standards to lend to good quality customers.
Lenders including IDBI Bank, Canara Bank, Bank of India, Union Bank of India and Federal Bank are looking at more asset or capital-light models to further their growth in products such as personal loans and fee income-based growth pushing differentiated and customised products.
Bank of India Managing Director (MD) and Chief Executive Officer (CEO) Dinabandhu Mohapatra in a recent interview with Moneycontrol said, “Old model of asset and revenue growth has caused problems for banks today. Banks must have smart banking strategy, focus on less capital and high spread-asset model, diversified and low concentration book, aim at non-interest income, utilise the non-fund based assets and re-price them.”
According to him, “Banks must (also) become more agile, become lean and smart in delivery mechanism to prevent frauds, more ownership oriented than employee oriented — all those who practice this will benefit going ahead. This will strengthen public sector banks.”
Even large private lenders, ICICI Bank and Axis Bank, which are already retail-focused burnt their fingers in project financing and corporate lending.
Now, ICICI Bank is gearing up to maintain its deposits in the current and savings accounts (CASA) to an average of 45 percent (45.9 percent currently) to boost its total retail deposit proportion to over 70 percent by 2020. It is also adopting a new approach toward corporate exposure. This entails lowering top exposure and changing the loan portfolio mix making retail loans account for over 60 percent (from 57 percent) of total loans, Chanda Kochhar, ICICI Bank’s CEO and MD, said in the financial results conference call.
Similarly, IDBI Bank and Union Bank of India are being careful in lending, ensuring risk-weighted assets are as low as possible.
Top private lenders such as ICICI, Axis and HDFC Bank have already ventured into the retail space and grabbed enough market share. However, a large portion of nearly 70 percent of the total lending business still relies on public sector banks.
With corporate loans and lax underwriting standards contributing to a majority of non-performing assets (NPAs) among the state-owned banks, they are now tightening processes and using more technology to drive good quality business.
Data analytics and employee training
For this, banks are also using data analytics and technology to check on the repayment capacity and quality of the borrowers.
For instance, Bank of India started Eklavya where employees are given training and experience to build the right knowledge and skill set as public sector banks have limited technological proficiency and IT background.
Canara Bank is also conducting awareness programmes to keep employees well-informed about the bank’s progress. It has also identified three training institutes to train on the latest developments to enhance knowledge in technology.
Private lender Federal Bank has recruited new heads to foray into four new “revenue accretive” businesses such as personal loans and commercial vehicles, which it did not step into earlier due to prudent measures but is now pushed towards it given the stress in the corporate loans.
Banks are also using credit bureaus to check the history of the borrowers.
Last week, Rajkiran Rai G, chief of Union Bank of India said, “We are trying to get a capital-light model and following better practices to ensure quality control and further improve our underwriting standards and using credit bureaus. We have become strict in terms of credit controls due to changes in regulation…We are shifting our focus from topline to operating profits.”
The mid-sized government bank has created 25 mid-corporate branches with 160 external officers and 200 internal ones to improve processes and use more technology to avoid defaults.
As many as nine public sector banks have reported cumulative losses for the fourth quarter at over Rs 31,600 crore and for the full year above Rs 43,000 crore.
Eleven state-owned banks are already under prompt corrective action (PCA) imposed by the Reserve Bank of India (RBI) for weak capital ratios and high NPAs. These stressed banks make up for 30 percent of deposits and 29 percent of advances of all the 21 public sector banks.
Moreover, NPA accounts under the Insolvency and Bankruptcy Code (IBC) are yet to see resolutions and recoveries coming through.
Now, even as government banks attempt to venture into an already established market by the private banks, they are hopeful of tapping the potential new markets in the smaller cities with better service delivery and improved controls.