Is India’s banking sector set for a high-growth phase?

Most banks have reported better-than-expected earnings in the last quarter (Jan-March) showing improvement in asset quality and healthy credit growth. Banks’ books look much cleaner at this point. For instance, HDFC bank’s gross non-performing asset (NPA) in Q4 declined to 1.24 percent, down from 1.26 percent in the last quarter. On the other hand, net NPA for the quarter stood at 0.33 percent compared to 0.31 percent.

Similarly, country’s largest lender State Bank of India (SBI) too reported a fall in bad loans. The gross non-performing asset (GNPA) of SBI came in at 2.24 percent as against 2.78 percent last year, while net NPA came in at 0.57 percent compared to 0.67 percent last year. At the post results press conference, Dinesh Khara, Chairman, SBI, said that the GNPA is the lowest in 10 years at 2.24 percent.

Credit growth too picks up

On the other hand, credit growth too is showing signs of pick up. SBI’s credit growth in Q4 stood at 15.24 percent on a YoY basis with domestic advances growing by 16.26 percent YoY. Corporate advances and agri advances cross Rs 11 lakh crore and Rs 3 lakh crore, respectively.

In the case of HDFC Bank too, the lender saw the highest loan growth of 55.4 per cent on-year owing to the merger of erstwhile HDFC with HDFC Bank effective July 2023. Sequentially, credit growth was 1.6 per cent higher. The bank’s deposits rose 26.4 per cent on year and 7.5 per cent on quarter.

Analysts are bullish on banking industry growth prospects. “The medium-term prospects look promising with sustained personal loans along with the anticipated increase in capex spending, especially in the private sector,” CareEdge said in a note. “Additionally, CareEdge estimates the credit growth to be in the range of 14%-14.5% during FY25. Further ebbing inflation could also reduce the working capital demand,” the agency said.

In Q4, banks’ credit to total assets ratio witnessed a downtick of approx. 7 bps compared to the previous fortnight and stood at 68.5% for the fortnight (May 3, 2024). Government Investment to Total Assets Ratio rose by 6 bps and stood at 25.6%. Meanwhile, overall government investments stood at Rs 62.2 lakh crore as of May 3, 2024, reporting a growth of 12.7% y-o-y, and 1.2% sequentially.

Further, deposit growth has seen relatively steady performance since Covid times. However, in recent periods, credit growth has been significantly outperforming deposit growth. Meanwhile as can be observed below, in absolute terms in recent times, deposits have witnessed higher inflows compared to the credit offtake, CareEdge says.

Interest rates

Overall interest rates in the banking system is likely to fall later this year as inflation eases to the central bank’s comfort level which will give headroom to the rate-setting panel—the Monetary Policy Committee—to reverse the rate course. A rate cut end of this year or early next year could improve corporate profitability, borrowing power of consumer and thus add to the banking sector growth. Thus, probably, this is a a good time for investors to look at quality banking stocks, per analysts.