Kotak Mahindra MD sees sector loan growth below RBI target

Kotak Mahindra MD sees sector loan growth below RBI target

New Delhi: Loan growth in India will likely be lower than the Reserve Bank of India forecast, the billionaire managing director of India’s Kotak Mahindra Bank said on Thursday, adding that the bank is cautious about lending to sectors such as infrastructure and telecom.

“I do believe the credit demand in India, which has grown at about 20%-plus last year, ...coming to about 15% this year," Uday Kotak told Reuters in an interview on Thursday.

The RBI in July cut its credit growth estimates for Indian banks to 18% from a prior target of 19%.

“I think the next big challenge for Indian banks is really how well they manage the credit cycle," said Kotak, who ranked 347 on Forbes list of billionaires in 2011.

The RBI has raised its key lending rate 11 times since March 2010 to reign in stubbornly high inflation, and high borrowing costs have dampened appetite for credit.

Larger peers such as ICICI Bank have trimmed their loan growth forecast, while HDFC Bank said it may not see a sharp spike in credit demand from corporates for new projects.

Uday Kotak first thought of becoming a banker in 1985, when there were no private banks in India. He set up Kotak Capital Management Finance, which later became Kotak Mahindra Finance. In 2003, Kotak Mahindra Finance became the first company in India’s corporate history to be converted into a bank.

Asset Quality Concerns

Banks have also turned cautious about higher risks to asset quality on the back of surging interest rates. Ratings agency Crisil expects bad loans to rise to about 2.6% of total assets in the fiscal year ending March 2012 from 2.3% a year ago.

Kotak Mahindra, in which Sumitomo Mitsui Banking Corporation holds a 4.45% stake, is cautious about lending to sectors such as infrastructure, airlines, telecom, as well as project finance business because of higher risks.

“We have tried and avoided very highly concentrated large corporate exposures. We think that is where some of the risks in the Indian banking system are and we have been more conservative on that," Kotak said.

He said the bank is also going slow on corporate finance, a sector where it has very little exposure.

“Some of the risks which you are finding in the corporate sector are coming in areas like project finance," said Kotak.

The investment banking and broking business will remain challenging over the next 12 months in a fragmented and low-margin market, Kotak added.

Rural Boost

Kotak Mahindra expects loan growth of 25 to 30% for the current financial year.

“We have a very significant loan book which is linked to semi-urban and rural India. That is the part of our book that is continuing to grow very strongly," Kotak said.

“Bulk of our deposit growth is coming from urban India and our lending growth is coming significantly from semi-urban and rural India."

A desire to modernize farming in Asia’s third largest economy is leading farmers to banks, as they rely on loans to buy tractors, farming equipment and agricultural commodities.

“If we grow overall at 25 to 30%, this segment is what is giving us a significant kicker to growth," said Kotak.

Shares of Kotak Mahindra, which the market values at Rs33,872 crore ($7.5 billion), ended 2.42% higher at Rs470.20 in a weak Mumbai market on Thursday.