What’s the outlook for private banks? Here are insights from Temasek’s Ravi Lambah 

Private banks have shifted focus to consumer banking in a big way, leading to a rise in the share of unsecured loans, especially personal loans and credit cards, over the past five years. At the same time, corporate banking exposure that shifted to high-rated corporate houses, offers lower returns. As the banking industry enters a new credit growth cycle, the question is how will banks navigate this changing landscape to manage risks and returns?

“I think, over a period of time, corporate will become a much bigger aspect of the banks’ growth in India. And it makes sense because corporate leverage is low, private sector capex is returning after almost a decade, and that will need to be financed. And to the extent it can be financed through a strong balance sheet, that obviously helps the companies, and debt is probably going to play an important part,” says Ravi Lambah , Head of Investment Group and India at Temasek.

Over a fifth of the global private equity giant’s $287-billion net portfolio investments are in financial services. In India, Temasek has investments in leading private lenders from HDFC Bank, to ICICI Bank, Axis Bank and AU Small Finance Bank.

Among Temasek’s portfolio companies, HDFC Bank is riding high after the reverse merger of parent HDFC Ltd that has brought a safe and secured mortgage portfolio under the banking platform; ICICI Bank is a turnaround story under Sandeep Bakhshi; Axis Bank, which acquired Citi’s consumer banking portfolio, is building a high-end portfolio in wealth management and credit cards; AU Small Finance Bank is the most diversified in the small bank pack, as others are struggling to diversify from unsecured microloans to more secured assets.

In the past five years, the high growth in the banks’ retail segment has compensated for the loss of growth on the corporate side. But the retail growth came from unsecured loans, especially personal loans and credit cards, where the yields are high but so is the risk. Where will retail growth come from in the next five years as banks enter a new credit growth cycle?

Lambah is banking on India’s higher economic growth and the rising GDP per capita. India’s GDP per capita is expected to grow from $2,000 to $5,000, implying that domestic savings too will rise. “The potential for customers to spend and save is going up,” says Lambah.

He also believes that India is unlikely to see a large mortgage crisis like the 2008 Recession in the US. “Housing defaults are, anyway, very low in India,” he says.

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Are there risks on the horizon? “I see the risk in unsecured loans, but I don’t know how much of that risk necessarily translates into problems for the banks. The banks are also getting a lot smarter with data. They have a lot of different data sources. They can understand how you spend, they can analyse your income, and they can analyse the way you are looking at saving; all of that is now driven by data. So, the banks will get smarter,” believes Lambah.

Will the changing business model of secured retail assets and high-rated corporates put pressure on net interest margins (NIMs) or the return on equity (RoE) of private banks? “Ultimately, banks have to manage their NIMs,” says Lambah, who has over three decades of experience in the financial and investment banking industry in the Asia-Pacific region.

“While high-quality credit pays less, the cost of servicing is coming down because technology is improving. The banks have to manage duration. I think, as you put both those things together—technology, managing duration, and also managing your cost structure—and of course, as you bring the yield down ( in safe and secured assets), you also bring the risk down. You are basically lending to someone with better credit, which reduces risk. This also means that there will be less provisioning pressure. I think ultimately, it all balances out,” he reasons.

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