LAP advances growth to slow in Fiscal 2021

LAP (banks and non-banks) registered a CAGR of approximately 17% between Fiscal 2016 and Fiscal 2019, driven by
rising penetration of formal channels and higher comfort for the lenders to lend. However, the growth slowed to
approximately 12% in Fiscal 2020 on account of the liquidity crisis and increasing asset quality concerns. In Fiscal 2021,
the outbreak of the COVID-19 pandemic has impacted economic activity and subsequently borrower’s cash flow which
will impact collections, thereby resulting in high asset quality risks. This will further increase the risk aversion towards
the LAP segment and players are expected to be more cautious to lend. Based on these factors, it is expected that LAP
credit growth will reduce to approximately 8% in Fiscal 2021, followed by faster growth thereafter, leading to a CAGR
of approximately 10% to 12% until Fiscal 2023.

Advances growth is expected to slow

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FY6 FYIT FY18 FYI9 FY20E FY23P

Note: E: estimated and P: Projected, Data Includes data for banks and nor-banks

Competitive scenario
Banks to gain market share as non-banks lose share due to restricted access to funds in the coming fiscals

After tight liquidity constraints in Fiscal 2019, non-banks have started focussing more on risk and compliance. They are
changing their strategies from solely opting for growth to targeting calibrated growth by taking calculated risks. In the
past few years, non-banks have lost their market share to banks owing to limited access of funds, deteriorating asset
quality and yield pressure.

Private banks, others banks (small finance banks and other co-operative banks) were able to capture market share on
account of the slowdown in PSUs and due to their aggressive market strategies, greater branch networks, lower cost of
funds, and the advantage gained by the liquidity crisis in the non-banks sector. Better understanding of local markets will
allow SFBs to capture in low ticket size LAP loans. It is expected that the trend will continue, with private and well-
capitalised banks capturing more share in this segment due to the slowdown in non-banks in the near term.

Segment profitability
Profitability in LAP segment

In the past, LAP yields were on a declining trend on account of higher competition and aggressive lending in the segment,
a majority of which was through balance transfers and top-up loans. Higher competition-led net interest margins
(“NIMs”) declined sharply from approximately 6.0% to 6.5% in Fiscal 2015 to approximately 3.5% to 4.0% in Fiscal
2018. In Fiscal 2019, NIMs further declined by approximately 10 bps to 15 bps since increased cost of funds could only
be passed partially to the customers.

In Fiscal 2020, in the declining interest rate scenario, yields are estimated to decline by approximately 5 bps to 10 bps.
Operation costs are estimated to have remained stable in Fiscal 2020. However, credit costs are estimated to have
increased since gross non-performing assets have deteriorated from Fiscal 2019 levels, as portfolio seasoning, slower
economic growth and the effects of the COVID-19 pandemic come into play.

It is estimated that GNPAs have increased by approximately 90 bps from approximately 3.3% to 4.2% at the end of Fiscal
2020 and it is expected further move up by approximately 80 bps to 130 bps to approximately 5.0% to 5.5% by end-Fiscal

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