Bank of Baroda plans to increase corporate lending as yield ratios improve

Mumbai: India’s second-largest public lender, Bank of Baroda, is returning to the corporate lending market and eyes strong growth punctuated by a recovery in the investment cycle. The bank, which increased business lending by 3% last year, aims to double the pace of expansion this fiscal year.

A rising interest rate cycle, wider spreads, higher quality assets and risk-return metrics are making corporate lending a profitable business, managing director Sanjiv Chadha told ET.

“We believe the cycle of rate normalization is allowing us to have decent growth with decent margins; therefore, we believe corporate lending will grow much faster for us compared to last year,” said Chadha.

He added that the bank would abandon its conservative view on the corporate segment as yield ratios improve.

“You always try to make sure your decision makes sense from a risk-reward perspective,” he said. “Last year, due to very high excess liquidity and abnormally low rates, we found that in the corporate segment, the spreads we had available were sometimes too narrow for the risk we carry. We so we’ve been quite cautious in growing our credit portfolio business.”

After declining for several years, business credit hit a seven-year high in May as India Inc firmed up its capital spending plans. Outstanding loans in this segment recorded growth of 8.7% in May 2022 against a drop of 0.2% a year earlier.

This expansion was driven by robust growth in the micro and small business (33.0%) and medium business (49.3%) segments. This is explained by the ECLGS, low base effect, higher working capital requirement, higher export and the application of digitization processes by banks for faster loan approvals.

The large enterprise segment (75.7% share within the industry) grew by 1.9% in May 2022 (compared to a decline of 3.1% in May 2021) due to cash requirements higher working capital due to high inflation, improved business activity and shift of borrowing to banking systems due to tighter capital market rates.

“If we compare it with the business loan growth cycle 5-6 years ago, the asset quality will be much better because when we saw the last investment boom, it was based on a blind investment cycle. “, Chadha added. “We are now seeing a good degree of consolidation, and most of the expansion is coming from stronger players. We are seeing significantly higher demand for investment credit compared to last year. We will still have to rely on the government to do the heavy lifting, but I think the private business credit cycle will start to pick up sharply.”

Chadha said the bank was particularly seeing a recovery in credit in the steel, cement, roads and renewable energy segments. Demand from the corporate segment is picking up as many sectors have experienced deleveraging and banks now see the potential to lend to large corporations again.

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