Motilal Oswal sector of the week: Banks; check top bets, target here

Motilal Oswal said that while PSU institutions are turning more aggressive, private lenders retain an edge through superior execution and tech-driven processes

Credit Market: Rising Competition, Pockets of Stress, and a Sharper Push for Growth

India’s lending ecosystem is undergoing a decisive shift as banks and intermediaries recalibrate their growth strategies amid evolving demand patterns, emerging stress pockets, and heightened competition across retail and corporate segments. Channel checks with large direct selling agents (DSAs) suggest that lenders are leaning more aggressively on commission incentives and flexible sourcing models to drive volumes, even as asset quality pressures emerge in select unsecured categories.

 

Across retail and MSME segments, unsecured business loans particularly mid-ticket exposures continue to show visible stress, with rising delinquencies and restructuring cases. While secured lending such as home loans and loan-against-property remains broadly stable, regional divergences are evident: markets like Kerala and Bihar are still challenged, whereas western and central regions are showing early signs of improvement. To defend market share, banks have raised commissions on unsecured products to 3.5-4.5 per cent and relaxed processing fee norms, underscoring a shift toward volume-driven acquisition despite tighter risk filters.

 

Competition is intensifying in personal loans and MSME credit as lenders extend tenures and sharpen pricing to ease borrower cash flows. Bounce rates, however, remain elevated in mid-ticket loans, signalling that overleveraging and multi-lender exposure continue to weigh on credit behaviour. Smaller lenders and regional institutions are increasingly active in tier-2 and tier-3 markets, expanding MSME and secured disbursals and challenging incumbent players with faster turnaround times and competitive rates.

 

In the corporate segment, a clear bifurcation has emerged. Large enterprises remain cautious, preferring internal accruals over leverage, while mid-sized companies are driving most of the incremental demand; primarily for working capital. Stress is beginning to show in unsecured corporate loans, with rising days-past-due and renewed restructuring even after earlier evergreening. Lenders are therefore prioritizing secured opportunities and lowering loan-to-value ratios in cyclical sectors.

 

Despite festive-season promotions supporting short-term flows, systemic demand remains selective, with limited impact from recent GST changes. Overall credit growth is expected to hold near 11-12 per cent in the coming year, supported by disciplined underwriting, targeted sourcing strategies, and continued appetite for secured retail and MSME credit. While PSU institutions are turning more aggressive, private lenders retain an edge through superior execution, tech-driven processes, and efficient DSA engagement models.  CATCH STOCK MARKET LIVE UPDATES TODAY

SBI – TP: ₹1,075

SBI stands out for its diversified growth momentum across retail, SME, and corporate segments, supported by a robust credit pipeline and digital transformation. The bank’s asset quality has improved markedly, with GNPA at 1.8 per cent and provision coverage nearing 79 per cent, positioning it well for the upcoming transition to the ECL regime. Credit growth of ~13 per cent Y-o-Y and healthy deposit accretion underline its strong franchise, while capital ratios (CET-1 at 11.3 per cent) provide ample cushion for expansion. 

 

Margin pressures from elevated deposit costs are expected to ease from 2HFY26, aided by CRR normalization and improved loan mix. Structural tailwinds from government-led capex, resilient MSME lending, and operational efficiency gains continue to support profitability. We expect FY27 RoA/RoE at 1.1 per cent/15.5 per cent, reflecting SBI’s strong operating leverage, contained credit costs, and sustained earnings visibility over the medium term.

ICICI Bank – TP: ₹1,700

ICICI Bank continues to demonstrate resilience amid sectoral challenges, showcasing operational strength and disciplined growth. This quarter, bank reported PAT of ₹12,360 crore, up 5.2 per cent Y-o-Y, aided by lower provisions, stable NIMs, and controlled opex. Advances rose 10.3 per cent Y-o-Y, led by Business Banking and retail segments, while asset quality remained robust. 

 

Management expects range-bound NIMs, benefits from CRR cuts, and continued retail growth, supported by strong credit discipline and technological investments. We estimate FY27 RoA/RoE of 2.3 per cent/17.0 per cent. We remain positive on ICICI, driven by strong fundamentals, stable margins, and sustainable growth prospects. 

(Disclaimer: This article is by Motilal Oswal Financial Services Research desk. Views expressed are their own.)