Mumbai: Axis Bank Ltd, India’s third largest private sector bank by assets, is reducing dependence on large and medium companies as it seeks to cash in on an increase in individual lending opportunities in smaller towns.

The bank has set a target of increasing its retail loan portfolio to 30% of total loans, up from 21% at the end of September.

A file photo of Axis Bank, Barakhambha Road, New Delhi branch

“In the short term, business will continue to be challenging but the long-term trend continues to be strong. The growth will come from smaller cities with metros continuing to grow," said Jairam Sridharan, senior vice-president and head consumer lending and payments at Axis Bank.

The bank’s retail loan portfolio stood at Rs29,343 crore, or 21% of its total loan book of Rs1.4 trillion at the end of the September quarter.

Retail is one of the pillars of Axis’ vision 2015, which was adopted by Shikha Sharma after she took over as managing director and chief executive officer in April 2009.

Currently, half of the bank’s 1,200 branches are in smaller towns.

The bank also has 85 offices that do not take deposits but process loans in small towns such as Bhavnagar, Belgaum, Jhansi and Rohtak across India.

Shridharan said low penetration of home and car loans and card transactions in such towns makes it a big opportunity for banks.

“Residential real estate growth is taking a breather and so are domestic car sales. Card growth is now positive after two years of negative growth. But it is the tier-II and (tier-) III towns that are showing tremendous growth potential," Sridharan said.

According to him, only 55% of the bank’s business currently comes from top eight cities compared to 75% three year ago.

Axis Bank’s strategy is similar to that of its larger rival HDFC Bank Ltd, which has steadily increased its retail book to exactly 50% of its loans by aggressively disbursing retail loans, feeding demand from the rural market.

HDFC Bank had lent an average of about Rs5,000 crore every month of the first quarter of fiscal 2012 to finance personal loans, commercial vehicles, auto and two-wheeler loans, which helped the bank’s retail business grow 30% year-on-year.

Axis Bank has seen a 26% compounded annual growth rate in retail loans since financial year 2007-08, giving it the confidence to increase its loan portfolio.

Currently, HDFC Bank has the largest retail portfolio after it overtook a cautious ICICI Bank Ltd, which had 60% of its loans coming from retail at one point.

Murli Gopal, research analyst at Brics Securities Ltd, said banks are focusing on retail to diversify their books in a tough economic scenario.

“Corporate loans are risky because they tend to be lumpy and one large delinquency in a scenario like this can have a negative impact. In retail, there is no such risk unless there is a systemic issue," he said. India’s economy grew at 6.9% in the September quarter, the lowest since quarter ended June 2009.

However, banks have to have better underwriting methods before giving out these smaller ticket loans, Gopal said.

Sridharan said Axis Bank is aware of the risk management needed in selling these loans and it will follow a “conservative" policy in this regard.

“When the economy is slowing down, corporate loan demand also slows, so this is a good time to diversify for Axis which is still better placed than other private sector banks like Yes Bank Ltd who have a high dependance on corporate loans," said Gopal, who has a ‘buy’ rating on the stock.

Axis Bank’s stock ended at Rs1,029 apiece on Monday, up 2.38% on BSE while the 30-share benchmark Sensex was at 16,805 points, down 0.25%. Local markets were closed on Tuesday.