ICICI Bank has had an enviable record in noticing the shifting winds before most of its competitors—and then applying the knowledge to its lending business.
It is this skill at turning around the ship in response to changed circumstances that has helped the country’s largest private sector bank steer clear of some of the travails of its two peers in the socialist-era attempt at directed lending to promote industrial growth, IDBI and IFCI. The former has stagnated, while the latter is in its death throes.
ICICI Bank dumped its traditional focus on industrial lending by the end of the 1990s and moved aggressively into consumer lending. This move in a way anticipated two larger trends in the Indian economy—a severe industrial slowdown and a splendid boom in consumption and home purchases at the beginning of this decade.
Now, ICICI Bank is going back to its original course, as reported by Mint on Monday. Its lending to companies is now growing at a faster pace than its lending to households. The bank says it now sees more opportunities in business lending rather than in consumer loans and mortgages.
Many other banks are likely to follow suit in the months ahead. The underlying cause is a shift in the nature of economic growth in India. It is now more dependent on investments rather than on consumption. Higher interest rates seem to have hit consumer spending more than corporate spending on new factories. It’s no coincidence that consumer industries have led the industrial slowdown.
But is there more to the story? Banks deal with corporate and individual customers on a daily basis and, hence, their decisions are an advance indication of the changing economic currents. There are signs that bad loans in the consumer side of the lending business are growing at a worrisome pace. It could mean that household balance sheets are deteriorating.
India has traditionally had to deal with episodes of weak corporate balance sheets because of the inevitable vagaries of the business cycle. But we could now be headed for a new phenomenon—household balance sheets groaning under the weight of the huge debts taken from banks over the past five years.
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