Hi everyone,  

Welcome to the 144th edition of The Pattern, a weekly where we dive into the latest from the world of economy, technology and finance. Let’s get started. 

The financial sector is witnessing a full-fledged battle. In this cutthroat battle, banks are gearing themselves with razor-thin credit margins and lower interest rates, throwing caution to the wind. All this to capture mid-sized corporate borrowers. This isn't just competition; it's an all-out price war where survival depends on who can lend the cheapest.  

But like any war, victory may come at an unsustainable cost.  

The RBI keeps raising concerns about the surge in unsecured lending, but its warnings seem to ruffle feathers only when regulatory action is taken. Yet, the banks seem to be in a race to flood the mid-corporate segment with easy money – a strategy that might not pay off for too long.  

What ignited this lending war?  

According to the RBI data, the weighted average lending rate on new rupee loans from banks fell to 9.25% in December 2024, down from 9.40% in November. The reason? There are simply too many banks competing to lend to too few mid-sized companies. This gold rush isn’t necessarily a good sign, because the rush to lend often leads to a fall in portfolio qualities.  

With the RBI becoming stricter for unsecured lending and slowing large corporate loans, banks have pivoted to the mid-corporate segment in search of new business. But this overcrowding is distorting market dynamics—lenders are underpricing risk, and in doing so, they are putting their own financial stability on the line. 

But as more lenders join the strife, a domino effect is set in motion.  

Mid-sized companies, many of which operate on unpredictable cash flows, are now securing loans at unsustainable rates. If the market shifts, these businesses will be the ones that become the epicentre of a credit crisis, and they will struggle to regain their financial footing. 

The problem is simple: too many lenders are targeting the same pool of mid-sized companies. This has created an unsustainable level of competition, forcing banks to offer loans at increasingly lower rates just to win business. 

With reckless lending comes inevitable consequences.  

The low interest rates don't compensate for risk. Even with the recent 25-basis-point reduction in the repo rate (from 6.50% to 6.25% ), banks are not securing enough returns to justify the potential defaults they may face. Short-term deposits are funding long-term loans, creating a ticking liquidity time bomb. If depositors withdraw funds unexpectedly, banks could face a liquidity crunch that disrupts operations.  

We should not forget the crisis surrounding NPA. Historically, whenever credit is extended too freely, the eventual result is a surge in non-performing assets, leading to financial instability. 

Banks are growing in this current trend, but at what cost?   

On the surface, the aggressive expansion of mid-corporate loan books looks like a sign of growth. As of December 2024, loans to medium-sized corporates grew by nearly 20% year-on-year , compared to just 5.1% for large corporates. Personal loans, by contrast, grew by 12% in the same period. 

While the government has taken steps to support small and mid-sized businesses—such as increasing credit guarantees and revising MSME classifications—banks like HDFC and Kotak Mahindra are voicing concerns about the long-term sustainability of this trend. 

"When too many players enter a particular space, irrational pricing tends to emerge. We have seen several banks targeting the MSME sector, but that leads to pricing distortions," said Manish Kothari, head of commercial banking at Kotak Mahindra Bank. "While the MSME sector has experienced relatively low credit costs in recent years, we understand this may not be sustainable in the long run. So, risk-adjusted pricing is a critical factor moving forward." 

Even HDFC Bank's Chief Financial Officer, Srinivasan Vaidyanathan, expressed caution: "Like the way we have seen spreads tighten in the larger corporate space, here too we see the spreads tightening, and that is something that we have been pretty cautious about. We don't want to increase our wallet share at any price." 

Banks must find an exit strategy soon.  

• Instead of blindly chasing loan book expansion, banks should focus on pricing loans based on real risk. Lending should be driven by creditworthiness, not just competitive pressure.  

• It's time to change a 'growth at all costs' mindset, as it could be fatal in the long run, and focus more on strengthening borrower assessments. 

• Banks should prioritise maintaining a balanced portfolio because diversifying lending across different segments reduces overexposure to risky sectors. 

The current lending spree may look like a golden opportunity, but unchecked risk-taking has a history of backfiring. If banks don't recalibrate their strategies, today's aggressive expansion could turn into tomorrow's bad debt crisis. The clock is ticking—will they stop the battle before it's too late? 

Reading List:  

1. Microfinance sector contracts below Rs 4 lakh crore amid loan disbursal woes  

2. PNB reports Rs 270.57 crore loan fraud by Gupta Power Infrastructure  

3. Provisioning for NPAs up 20% in December, driven by sharp rise in private sector bank provisions  

4. RBI is responsible for shutting down New India Cooperative Bank.  

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on X here and follow FinBox on LinkedIn to always get all updates.  Cheers, 

Mayank   All opinions expressed are my own and do not necessarily reflect the views of FinBox or its promoters.