HDFC Bank Ltd., India's most valuable lender by market capitalization, sees tentative signs of a revival in rural areas at a time when the wider economy is sputtering.
"The recent loan outreach programs underway in rural areas have given us the sense that the consumption in rural and semi-urban areas is turning more positive," HDFC Bank Executive Director Kaizad Bharucha said in an interview last week. As of end-September, 52 per cent of the bank's outlets were in rural and semi-urban India, a part of the economy that accounts for at least half of the national output.
Prime Minister Narendra Modi's government has unveiled several steps to boost the economy, which is growing at its weakest pace in more than six years, including a surprise $20 billion corporate tax cut. The Reserve Bank of India is expected to cut interest rates again this week, after Friday's report that gross domestic product growth slowed to 4.5 per cent in the September quarter.
For HDFC Bank, the weaker economy had led to a slowdown in loan growth, which eased to 15 per cent in the September quarter from 23 per cent a year earlier. But it remained healthy compared with the overall banking system which saw credit growth slowing to a two-year low just above 8 per cent.
"As a bank we are well positioned to offset a slowdown in either the consumption or investment side as we are present across the spectrum," Mr Bharucha said. "The demand for credit is not going away. It may just be subdued for a period of time," he added.
He's also cautiously optimistic about the outlook for corporate investment, based on the bank's soundings with Indian executives.
Muted loan growth has hardly dented the upward march in HDFC Bank's shares, which are about 19 per cent higher so far this year. Now valued at about $96 billion, the company trades around 26 times projected 12 month earnings. That's almost three times more expensive than the Bloomberg World Banks Index and is the biggest valuation premium on record.
Meanwhile, non-bank lenders from Dewan Housing Finance Corp Ltd. to Reliance Capital Ltd. have been reeling under a 17-month credit crisis after Infrastructure Leasing & Financial Services Ltd. defaulted on its debt last year. In a further blow to confidence, the Securities and Exchange Board of India placed curbs on operations of Karvy Stock Broking Ltd. after finding evidence it misused client funds.
But Mr Bharucha doesn't see a wider industry problem.
"There is enough control over stockbrokers and depositories and a default in the segment will not have a systemic impact," he said. The central bank "has ensured that there is adequate liquidity in the system and availability of credit is not a problem."