Yes Bank, IDFC First Bank seek to revive corporate lending

With several legacy corporate and infrastructure loans having run their course, these two banks are now keen to increase such advances in the coming quarters, albeit gradually, clearly indicating that this is not a shift in strategy. 

Corporate loans of Yes Bank, which has seen a recovery in business after an uncomfortable past, increased 5.9% in FY24, compared with a drop over the past three fiscal years. 

And for IDFC First Bank, which started life as a development finance institution and later converted into a bank, its overall corporate loan book grew 16% in FY24, compared to 2% in the previous year.

The renewed focus on corporate loans from these two banks comes at a time when the overall banking industry is seeing a credit growth of 16% year on year. This growth is expected to slow down to 12-14% over the next 12-15 months, according to Moody's Ratings. For private sector banks, corporate credit growth has been muted.

“Corporate credit pickup was at 5-6% over the last few years," said Amit Pandey, vice president, Moody's Ratings. "It is expected to pick up a little but unlikely to touch the numbers which were seen during the heydays." 

Yes to corporate loans

Prashant Kumar, managing director and chief executive of Yes Bank, explained that while new loans have been disbursed over the past few months, legacy corporate loans had also been repaid at the same time, which resulted in lower corporate loan growth.

With the existing book being run down, the bank hopes corporate loan growth will pick up.

“As guided earlier, we expect that within advances, the ratio of retail + SME (small and medium enterprises) segment advances to wholesale segment advances (mid-corporate and large corporate) would remain at the similar level of 62:38 from here on over the near-to-medium term," Kumar said on a call with analysts.

“Within advances, while we would continue to drive a steadfast growth in the SME and mid-corporate segment and further enhance our focus on profitability improvement within retail, we would expect corporate advances segment to grow in high single digits."

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During founder Rana Kapoor's tenure four years ago, Yes Bank used to give 60% of its loans to companies. After the Reserve Bank of India superseded the bank’s board in March 2020 and put in place a reconstruction or amalgamation scheme, the lender’s loan book diversified to more retail and small business loans.

In December 2022, Yes Bank had transferred bad loans worth ₹48,000 crore to J.C. Flowers Asset Reconstruction Pvt. Ltd.

For IDFC First, a healthy mix

IDFC First Bank, too, is looking at a healthy mix of retail and corporate loans, which currently stands at 83:17. 

Almost 90% of its loan book was focused on corporate lending and infrastructure financing five years ago, when IDFC Bank and Capital First announced a merger to form IDFC First Bank.

However, IDFC First Bank made a conscious decision to reduce its corporate loan exposure because it had turned bad after the merger. Over the years, the bank’s corporate loan exposure shrank, falling to 17% at the end of March 2024 from 48% in FY19.

The bank's corporate book (non-infrastructure) has slowly started picking up, growing 16% year-on-year in FY24, even as the share of infrastructure loans in wholesale assets has declined.

Also read | IDFC First Bank: The Next Kotak or the Next Yes Bank?

"With commodity cycle recovering from their recent lows, we expect working capital needs of both manufacturers and trading service providers to grow over FY25," said Paritosh Mathur, wholesale banking head, IDFC First Bank. “We had credit costs in the last cycle in corporate banking, so we have conservative credit risk exposure norms and look at cash flows closely."

Mathur added that IDFC First's cost of funds had reduced over the past years, relative to that of its peers. "Therefore, it enables us to lend to a much larger universe of corporate clients as compared to, say, five years back," Mathur said.

That said, both IDFC First Bank and Yes Bank have a high cost of funds as compared with other banks, at around 6.5%. Comparatively, HDFC Bank and ICICI Bank have 3.7% and 4.86% cost of funds, respectively.

Cost of funds for IDFC and Yes Bank could be even higher if their capital requirements are taken into account. This could restrict their lending to AAA-rated companies, which typically command better pricing.

Muted demand, higher slippages

Looking ahead, ratings agency India Ratings said in its latest release that demand for credit from companies with capital expenditure plans will remain muted, driven by strong cash flows, the modular nature of investments, and the flexibility to tap the equity markets.

“Consequently, financial leverage is likely to remain muted and a meaningful increase in the credit requirements of banks/capital markets will be largely driven by movements in working capital cycles and/or potential inorganic opportunities," India Ratings said. “This could keep credit spreads tighter than historical levels."

RBI’s November direction to increase the risk weights on unsecured loans could also be why Yes Bank and IDFC First Bank see corporate loan growth as an opportunity.

There has been a spike in slippages—the rate at which loans turn bad—in Yes Bank’s unsecured retail portfolio over the past few quarters. According to the bank, the impact of the increase in risk weights has been nearly 40 basis points, which was fully offset by organic core equity capital accretion, including profits of almost 50 basis points.

IDFC First Bank took a 1% hit on capital due to the increased risk weights on consumer loans. The bank recently raised ₹3,200 crore via a preferential allotment to fund growth while factoring in the new risk weights. 

IDFC First plans to grow its newly launched products, such as credit cards, gold loans, tractor loans, car financing, and affordable housing, strongly.