Could a higher risk weight-led normalisation in retail credit present an opportunity for wholesale credit to pick up?

Absolutely. Even keeping the RBI norms aside, corporate credit is coming back. Government spending has led capex financing, but corporates are very deleveraged and a lot of investment is coming in. It may take 12 to 18 months, but the private capex cycle should return quite strongly. Banks have used this time to prepare and think about avenues beyond loans, whether loan syndication, bond market, ECBs or IPOs. They’re prepared to take the full suite of financing vehicles because the one thing that did not play well for them in the last cycle was the reliance on lending income. That lesson has been learned quite well. Even if they’re not a primary lender, they need to be the primary corporate banker. Banks that will do broader fee-based business and also get liabilities are the ones poised to win.

Are we then headed to a more transactional banking relationship model?

Yes, because it’s also more sticky. A borrower can have multiple consortium lenders, but only 2-3 primary banks and that’s what banks are fighting for. Even globally, corporates which have more products with a bank, are willing to pay a higher price even on the lending side, because the switching cost is much higher. A full banking relationship also gives you a view of the cash flow. Both from an underwriting, but more importantly early warnings perspective, helps manage risk. So, this is definitely a phenomena to stay. The only difference in India is that there will be fewer winners, and it will separate ‘the boys from the men’ in terms of who gets the larger pie of corporates.

Over the last few quarters, banks are relying more on bulk deposits. Is this also cyclical or are bulk deposits going to be the main liability source?

Customers have started maturing in their financial literacy, and so even as savings increase, the investments are also rising. This means CASA ratios of 45-50 per cent will not always be sustainable. From the institutional liability side, corporates usually avoid non-interest bearing CA, but some of the regulations and the tax changes have made liquid MFs less attractive, and so they will continue to have 10-15 per share in overall liabilities. SME is the biggest play at 65 per cent, because the need for basic cash management and transaction banking solutions is quite high, and banks that can crack that are the ones who get the liability. The last phenomena, which has played out to a large extent already, is the government mandate of not keeping money in non-interest bearing deposits. That share has come down from 35 per cent of CA to 15 per cent and is a permanent loss. Thus, going ahead, CASA will not be the mainstay and liabilities will in time move to alternate investments.

Will MSMEs lead corporate credit amid muted demand from large corporates?

SME has always been a tricky business because it has the risk of a corporate, but the cost of retail distribution. Over the last few years, GST and UPI (especially P2M) have made bank statements thicker and largely taken care of underwriting risks. The question is how to reduce the cost of acquisition. That’s where the digital play comes in. On the other hand, banks also want to move away from a pricing battleground and offering value-added services for the business such as an accounting system, ERP support, setting up a website, or HR software, creates a lot of stickiness and banks get to expand the formal credit market instead of taking market share from each other. So, even though the large corporate cycle will return, SMEs will continue to see 20 per cent kind of growth. 

What segments are leading growth, both in SME and broader private capex?

In MSME, we’re seeing a lot more investments in green finance, EV supply chain, and traditional sectors purely because they are under penetrated. Deeper tier supply chain is one place we are seeing growth, and from merchants and SMEs which are getting digitally paid. In terms of broader private sector, climate financing is coming up and ‘Make in India’ led manufacturing, also because of the PLI push. In addition, financial institutions are becoming bigger. The FIG segment of corporates will grow as as the economy involves and become the third pillar of corporate growth.