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Federal Bank Sees Modest 8-10% Corporate Loan Growth Amid Tariff Concerns

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  Published in Business and Finance on Saturday, August 2nd 2025 at 18:50 GMT by moneycontrol.com
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Federal Bank's Corporate Loan Book Set for Modest 8-10% Growth in FY26 Amid Tariff Uncertainties and Bond Market Appeal, Says CEO

In a recent interaction with financial analysts and media, Shyam Srinivasan, the Managing Director and Chief Executive Officer of Federal Bank, provided a detailed outlook on the bank's lending strategies, particularly focusing on its corporate loan portfolio. Srinivasan projected that the bank's corporate loan book, which forms a significant portion of its overall advances, is likely to expand at a relatively subdued pace of 8-10% in the financial year 2026 (FY26). This conservative growth estimate comes against the backdrop of several macroeconomic factors, including uncertainties surrounding import tariffs and the increasing attractiveness of the bond market as a cheaper funding alternative for large corporations.

Srinivasan elaborated that the slower growth in corporate lending is not indicative of any internal constraints at Federal Bank but rather a reflection of broader market dynamics. One key factor is the ongoing uncertainty related to tariffs, especially in sectors like manufacturing and exports that are sensitive to global trade policies. With potential changes in international trade agreements and domestic tariff structures, many corporations are adopting a wait-and-watch approach before committing to large-scale borrowings. This hesitation has led to a slowdown in demand for bank loans from the corporate sector, prompting banks like Federal to temper their expectations accordingly.

Adding to this, Srinivasan highlighted the shift towards the bond market as a preferred funding avenue for blue-chip companies. He noted that interest rates in the bond market have become increasingly competitive, often offering lower costs compared to traditional bank loans. This trend is driven by ample liquidity in the debt markets and favorable yields, making bonds an appealing option for corporates looking to optimize their financing costs. As a result, Federal Bank's corporate clients are diversifying their funding sources, which in turn impacts the bank's loan book growth. Srinivasan emphasized that while this might cap the expansion in the short term, it aligns with the bank's strategy to maintain high-quality assets and avoid overexposure to volatile segments.

Despite the moderated outlook for corporate loans, Federal Bank's overall advances are poised for robust growth. Srinivasan reiterated the bank's guidance for total advances to grow by 18-20% in both FY25 and the upcoming FY26. This ambitious target is underpinned by strong performance in other segments, particularly retail and commercial banking. The retail loan book, which includes personal loans, home loans, and vehicle financing, continues to be a growth driver, benefiting from rising consumer demand and improving economic sentiment. Similarly, the commercial banking segment, catering to small and medium enterprises (SMEs), is expected to contribute significantly, with tailored products designed to support business expansion in a post-pandemic recovery phase.

On the liabilities side, Srinivasan expressed confidence in maintaining deposit growth in line with advances, projecting an 18-20% increase for FY25 and FY26. He attributed this to Federal Bank's strong brand presence in key markets, especially in South India, and its digital initiatives that have enhanced customer acquisition and retention. The bank has been actively promoting high-yield savings products and fixed deposits to attract retail depositors, while also tapping into non-resident Indian (NRI) remittances, which remain a stable funding source. This balanced approach to deposit mobilization is crucial for sustaining the bank's net interest margins (NIMs), which Srinivasan guided to remain steady at around 3.2% for the foreseeable future.

Delving deeper into asset quality, Srinivasan provided reassuring updates, stating that Federal Bank's gross non-performing assets (NPAs) and net NPAs are well under control. He attributed this to prudent underwriting practices and proactive risk management, including regular stress testing of portfolios. The bank has also benefited from economic tailwinds, such as moderating inflation and stable employment levels, which have reduced default risks across segments. Looking ahead, Srinivasan does not anticipate any significant deterioration in asset quality, even as corporate lending grows modestly, thanks to a focus on high-rated borrowers and diversified exposure.

Srinivasan also touched upon the bank's strategic priorities, emphasizing digital transformation as a cornerstone for future growth. Federal Bank has invested heavily in technology platforms to streamline operations, enhance customer experience, and expand its reach beyond traditional branches. Initiatives like mobile banking apps, AI-driven credit assessments, and partnerships with fintech firms are expected to drive efficiency and open new revenue streams. In the corporate space, the bank is exploring customized solutions such as supply chain financing and green loans to align with emerging trends like sustainability.

The CEO's comments come at a time when the Indian banking sector is navigating a complex landscape marked by regulatory changes, interest rate fluctuations, and global economic headwinds. For instance, the Reserve Bank of India's (RBI) stance on monetary policy, with potential rate cuts on the horizon, could further influence lending dynamics. Srinivasan acknowledged these factors but remained optimistic about Federal Bank's positioning, citing its strong capital adequacy ratio and liquidity buffers as key strengths.

In terms of sectoral focus, Srinivasan indicated that while corporate lending growth is tempered, the bank sees opportunities in infrastructure, renewable energy, and technology-driven industries. These areas are less affected by tariff uncertainties and could provide higher margins. However, he cautioned that the bank would not chase growth at the expense of risk, preferring a measured approach that prioritizes long-term sustainability over short-term gains.

Expanding on the bond market's impact, Srinivasan explained that many large corporates, particularly those with strong credit ratings, are issuing bonds to lock in lower rates amid expectations of a softening interest rate environment. This has led to a phenomenon where banks like Federal are seeing reduced demand for term loans and working capital facilities from their top-tier clients. To counter this, the bank is intensifying its efforts in mid-market corporates and SMEs, where bond market access is limited, and bank financing remains the primary option.

Srinivasan also addressed investor concerns about profitability, assuring that the bank's return on assets (RoA) and return on equity (RoE) would remain healthy, supported by fee income from non-lending activities such as wealth management, insurance distribution, and trade finance. He projected that these ancillary revenues would help offset any pressure on interest income from slower corporate loan growth.

Looking beyond FY26, Srinivasan hinted at a potential acceleration in corporate lending if tariff uncertainties resolve favorably and global trade stabilizes. He referenced ongoing government initiatives like the Production Linked Incentive (PLI) scheme, which could boost manufacturing and, in turn, credit demand. Until then, Federal Bank plans to maintain a diversified portfolio, with retail and commercial segments compensating for the corporate slowdown.

In summary, Federal Bank's CEO painted a picture of cautious optimism, balancing moderated corporate growth with strong overall performance. By navigating external challenges like tariff ambiguities and bond market competition, the bank aims to sustain its trajectory as a resilient player in India's private banking space. This outlook underscores the importance of adaptability in an evolving financial ecosystem, where strategic foresight will determine long-term success. (Word count: 928)