James Syme

Senior Fund Manager, JOHCM

India’s credit cycle challenges

“The Reserve Bank of India has asked banks to initiate bankruptcy proceedings against 12 large loan defaulters, accounting for a quarter of nearly INR 9trn that the banking system has piled up in bad loans.”

Hindustan Times, 7 August 2017

Our top-down process looks at a broad range of top-down drivers of emerging equity markets. One market that we have been positive on for several years has been India, with a preference there for domestic cyclical stocks. Both of those views have contributed positively to the performance of the portfolio. Since September 2013, the MSCI India index has delivered a total return of 56.6%, in US dollar terms, well above the MSCI Emerging Markets Index total return of 20.0%. That is not to say, however, that all of the drivers have played out as we expected. In particular, we have been revisiting our positive view on the banking and credit cycle in India.

We had expected an upswing in the credit cycle, which would be supportive of economic growth, both through consumption and investment. Inflation has come in substantially below expectations and both private sector credit/GDP and the loan/deposit ratio of the banking system have declined in recent years, in contrast to the ramp-ups of credit seen in some other emerging markets. Yet despite the apparent opportunity, growth has not come through. In the year to Q1 2017, we estimate system loan growth at 6.2%, compared to a 10.2% increase in nominal GDP. This is both negative for banking sector stocks and also for other cyclical stocks in India. Where were we wrong?


Looking into the reports from the banks, it is clear there is a three-tier structure to growth in the Indian banking system. We have focused on the year to Q1 2017, but where Q2 2017 results are available, the pattern is the same.

The good news is in retail credit, particularly consumer and mortgage finance. Overall, we see loan growth of specialist mortgage lenders at 18.3% and that of consumer finance institutions at 16.9%. This pattern is mirrored within the loan books of more diversified private sector banks. Private sector banks did well (loans +14.7%) but were generally held back by weaker growth in corporate lending departments. In the portfolio we own HDFC Bank (loan growth +19.4%, led by retail), ICICI Bank (retail loans +18.5%, corporate +5.8%), Axis Bank (retail loans +21.0%, led by home loans; corporate loans flat) and Yes Bank (loans +34.7%, with the retail business growing 140%).1

With the very strong consumer and mortgage growth and the moderate growth in corporate loans from private sector banks, it is the state-owned (PSU) banks where the real disappointment comes in. PSU banks saw loans grow just 2.5%, with heavyweight State Bank of India at 7.3% and weaker growth elsewhere.1 It is particularly in the PSU banks where the much-reported non-performing asset (NPA) problem sits. The clean-up is positive for India in the long run, but the write-off of NPAs eats into both loan growth and capital of the banks, and has been a drag in the short term. We continue to be believers in the Modi administration’s reform process, but see the PSU banks being a problem for some years yet.

In this three-tier structure the private sector banks (including those we hold) have been able to do well, particularly from the retail sector, and this has benefited the portfolio. However, we have not yet seen the broad increase in lending that would lift overall growth in the Indian economy. We continue to see opportunities in the banking system, but recognise that a broad credit recovery may still be some way off.

1 Source: Bloomberg/JOHCM as at August 2017.



This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at August 10, 2017. It is not to be published, or otherwise made available to any person other than the party to whom it is provided.

PFSL is the responsible entity and issuer of units in the BT Wholesale Global Emerging Markets Opportunities Fund (Fund) ARSN: 159 605 811. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1800 813 886 or visiting www.pendalgroup.com. You should obtain and consider the PDS before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested.

This article is for general information purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation.

The information in this article may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information in this article is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information.

Any projections contained in this article are predictive and should not be relied upon when making an investment decision or recommendation. While we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections.