What is driving the optimism in India's banking sector?
In the July-September quarter, both state-owned and private lenders performed well. Twelve public sector banks reported a net profit increase of 50% yearly to 25,685 crore rupees.
The increase was primarily due to a steady increase in net interest income and lower provisions. PSBs’ second-quarter results were bolstered by strong credit growth and net interest margin expansion. According to experts, while net interest margins may moderate, healthy profitability will likely continue.
Additionally, asset quality rose. At the end of September, gross non-performing assets for state-owned lenders fell to 4.98 trillion rupees, a 15.8% annual decline. Additionally, their net NPAs decreased 13% yearly to 1.28 trillion rupees.
On a year-over-year basis, however, hardening yields have affected treasury income. Experts also predict that the Treasury’s performance may remain subdued.
Private lenders reported a combined profit of 33,165 crore rupees, a 67% increase from the previous year. The higher net interest income and strong loan growth drove the profit numbers. Following the 190 basis point increase in the repo rate, there was a delay on the banks’ part in passing higher interest rates to depositors while driving up the lending rates.
This resulted in a striking increase in these lenders’ margins. Asset quality also significantly increased due to a year-over-year gross and net non-performing assets decline. Most private banks experienced double-digit portfolio growth, broadly in line with the credit growth.
In light of this, the Indian banking industry is now perceived as optimistic.
According to Business Standard Consulting Editor Tamal Bandyopadhyay, the quality of assets is the main driver of the banking sector’s general optimism in India. After suffering through the asset quality review, the sector has succeeded.
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On the asset side, Bandyopadhyay continues, the balance sheets appear to be in good shape. He claims that lower slippages and recoveries are also boosting optimism. Since the June quarter, the provision for bad assets, which had been eating away at lenders’ profits, has decreased significantly. The provision coverage ratio is very high for the majority of banks. The industry is currently quite healthy overall. Others have a positive outlook on the industry.
Concerning aspects are present as well. Even though credit demand is at a decadal high and liquidity is still significantly reduced, according to a State Bank of India research report, banks are not adequately pricing in credit risk. Shaktikanta Das, governor of the RBI, stated earlier this year that banks could not depend on the money from the central bank indefinitely to support credit offtake and would instead need to mobilize their funds and resources.
According to the most recent data from the RBI, as of October 21st, bank credit growth was almost 18% year over year, while deposit growth lagged far behind at less than 10%. This makes it unclear how long-lasting this recovery will be in the ensuing months.
Bandyopadhyay adds that the underwriting has not been flawless and warns us to be wary of any irrational exuberance in the credit segment. He claims that there is concern that some state undertakings, who likely think they are the proxy sovereign, maybe make loans without the proper underwriting. As a result, he warns that some banks may again have higher NPA levels.
Banks will need to aggressively increase deposits in the days to come to secure long-term liquidity and satisfy the soaring credit demand. They have to keep underwriting as credible as they can while doing this.
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