Indian banks: power to the consumer

The Reserve Bank of India aims to stop loan officers from throwing good money after bad. This week, 12 unnamed Indian companies were recommended for referral to the Insolvency and Bankruptcy Code. The upshot is likely to be outperformance by shares in private sector banks with consumer credit exposure.

The government push could lead to long workouts for debts amounting to a quarter of all non-performing assets nationally. State-owned banks’ provision levels are likely to be revealed as insufficient.

India’s growing economy needs banks that can support it. Policy rates have fallen, yet loan growth has shrunk. Distressed loans amount to 15 per cent of bank assets, of which only a quarter are provisioned. Public sector banks especially lend to the struggling steel and power sectors. The IBC process allows six to nine months before liquidation is even considered.

Private sector banks have expanded their loan books while remaining better capitalised. Take ICICI. Its core equity tier one capital ratio is 14 per cent; the public sector median is less than 9 per cent. Consumer lending is more than half of gross lending, up from a third in 2013. Only 1.5 per cent of them are non-performing.

Consumer lending will continue to grow. The RBI mandated a cut in risk weights for certain mortgages in May. This will lower capital requirements on housing loans and so increase lending. Moody’s warns this is negative for bank’s credit health. But it provides an economic boost while corporate lending stalls. Housing credit has already grown at twice the speed of overall credit since 2015. Loan quality is stable — but risks deteriorating if the corporate slowdown affects consumers’ financial health.

Lenders specialising in mortgage finance look the most attractive. Indiabulls Housing Finance has almost doubled this year, and trades at 3 times book value. At half that valuation, ICICI is a safer bet.

Email the Lex team at lex@ft.com