Banking Sector: Ready To Tip The Scales

Banking Sector: Ready To Tip The Scales

In case of absence of the third wave, the banking sector might continue its outperformance streak in the coming quarters. Armaan Madhani elucidates that the latest data plainly indicates decent signs of uptick in credit growth and with the corporate capex cycle picking up pace, high growth for banks could materialise 

The disruptions caused by the two waves of the pandemic saw India’s Gross Domestic Product (GDP) shrink by 7.3 per cent for FY21 and growth estimates for FY22 slashed from the earlier 12 per cent to approximately 9 per cent. However, the Reserve Bank of India’s Financial Stability Report (FSR) of July 2021 says that Indian banks have robust liquidity and capital buffers to withstand future shocks as the impact of the pandemic on their balancesheets has not been as acute as projected earlier. The government’s initiatives to impel credit to sectors gaining traction through a diverse variety of guaranteed schemes have helped generate demand and credit growth.

Bank Nifty recorded fresh all-time high of 41,829.60 on October 25, 2021. In the last one year, the index has escalated by roughly 70 per cent from 25,000 to 41,000, buoyed by robust rally in heavyweight stocks such as HDFC Bank, ICIC Bank, Kotak Mahindra Bank and State Bank of India (SBI). The gains are underpinned by healthy economic stimulus furnished by the government, a lower interest rate regime and ample liquidity. The upsurge in the Bank Nifty index has largely been led by banks that have witnessed robust disbursements in housing and vehicle loans. With the advent of the festive season, bank credit growth should get a fillip driven by the retail and agriculture loan sub-segments.

Indian banks have recorded 6 per cent credit growth on an annual basis in June 2021 as against growth of 6.4 per cent last year. Also, in June 2021, the share of current account and savings account (CASA) deposits in total deposits increased further to 43.8 per cent compared with 42 per cent a year ago. While deposit growth outpaced credit growth, the all-India credit-deposit ratio dipped to 70.5 per cent in June 2021 compared with 73.1 per cent a year ago. As per data from the Reserve Bank of India’s recent ‘Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks’, growth on a year-on-year basis in credit by private sector banks was 10.1 per cent while for public sector banks it was merely 3.1 per cent.

The aggregate deposits’ growth on an annual basis stood at 10 per cent in June 2021 as compared to 11.5 per cent in the previous year. Deposit accretion in private sector banks has grown at a faster pace relative to the public sector banks. With the Indian banking sector being sufficiently capitalised and well-regulated along with superior financial and economic conditions, it is evident empirically via credit, market and liquidity risk studies that Indian banks are resilient and have withstood global downturns adroitly. However, competition in the Indian banking sector has intensified with the entry of foreign banks.

The growth in retail loans particularly in the real estate sector is being fuelled by measures taken by the various state governments to shrink stamp duty on property registration. In fact, property registrations in metro cities such as Mumbai and Bangalore are presently at all-time high levels. MSME disbursements have also gained strong momentum in recent quarters. Cumulative net interest incomes (NII) of banks are also ameliorating across the board. As per data released by the RBI in July, disbursements to agriculture and related areas continued to perform well, registering a thriving growth of 12 per cent in July 2021 as compared to a mere 5 per cent in July 2020.

Led by Technology

Domestic banks are increasingly looking at consolidation to derive greater benefits such as enhanced synergy, cost take-outs from economies of scale, diversification of risks and organisational efficiency. Also, technology advancement has brought internet and mobile banking services to the fore. Banks are laying extra emphasis on continuously upgrading their technology infrastructure to improve the customers’ overall experience, in turn helping banks to build a competitive edge over their peers. Soaring online transactions during the pandemic and growing caution among traditional lenders underpinned by a rise in bad debt has given a fillip to India’s digital payments.

According to estimates from the Boston Consulting Group, digital lending is expected to treble to USD 350 billion by 2023 and reach a total of USD 1 trillion in the five years since 2019. The digital payment revolution will certainly trigger enormous changes in the way credit is disbursed in the country. To quote an excerpt from a report by Indian Brand Equity Foundation, “Enhanced spending on infrastructure, speedy implementation of projects and continuation of reforms are expected to provide further impetus to growth in the banking sector. All these factors suggest that India’s banking sector is poised for robust growth as rapidly growing businesses will turn to banks for their credit needs.”

Economical Turnaround

Moody’s Investors Service expects India’s economy to continue to recover in the next 12 to 18 months, with GDP growing 9.3 per cent in the fiscal year ending March 2022 and 7.9 per cent in the following year. The rating agency has revised the outlook for the Indian banking system from negative to stable. The pickup in economic activity is expected to drive credit growth, which Moody’s Investors Service forecasts to be 10 per cent to 13 per cent annually. In a report titled ‘Banking System Outlook – India: Stabilising Asset Quality and Improved Capital Drive Outlook Change to Stable’, Moody’s Investor Service says, “The deterioration of asset quality since the onset of the corona virus pandemic has been moderate, and an improving operating environment will support asset quality.”

“Declining credit costs as a result of improving asset quality will lead to improvements in profitability. Capital will remain above the pre-pandemic levels,” it adds. The report also highlights that ‘weak corporate financials and funding constraints at finance companies have been key negative factors for banks but these risks have receded.’ ICRA in its recent report has said that the Indian banking sector is insulated against the pandemic. As per ICRA’s estimates, the gross non-performing assets (GNPAs) and net non-performing assets (NNPAs) are expected to further decline to 6.9-7.0 per cent and 2.2-2.3 percent, respectively, by March 2022 which will continue to be a relief for the bottom-line of lenders.

Performance Review: 1QFY22

The overall retail credit growth for 1QFY22 was 12 per cent on a year-on-year basis. This could witness a bounce-back in the coming quarters on account of the forthcoming festive season and strong pent-up demand. During the quarter, new business generation was impacted by the lockdowns while the systemic loan book growth remained subdued across the board. As per a recent report by Nirmal Bang on the banking and financial sector, “In view of the surplus liquidity in the system and low rates, large entities have been borrowing from the debt capital markets where pricing is attractive. The current view is that corporate credit is expected to pick up pace in H2FY22 on the back of new project announcements and increase in utilisation levels.”

Interest rates at multi-year low levels and abundant liquidity during 1QFY22 aided the banking sector to report the highest profits in 23 quarters. Despite the second wave of the pandemic, the banking sector has reported its highest yearly profits in the last five years and profit momentum is continuing its upward trajectory from FY21. Private sector banks reported quarterly profit at Rs 17,560 crore, up by 22.6 per cent and 10.2 per cent on an annual and quarterly basis, respectively. Loan growth for private banks remained better than the industry average at 11.1 per cent and they continued to acquire more market share from PSU banks.

Asset quality deterioration was distinct for private banks as GNPA rose to 4.54 per cent from 4.31 per cent in the previous quarter. Elevated provisions also hurt profitability. PSU banks reported quarterly profits at Rs 14,615.4 crore, up by a mega 143.6 per cent and 43.8 per cent on an annual and quarterly basis, respectively. None of the PSU banks reported net loss for 1QFY22. Sequentially, PSU banks have outperformed private banks for the second quarter in a row. The provision coverage ratio for PSU banks was at 68.8 per cent, almost at par with 69.2 per cent for private banks.

PSU banks reported higher profitability as compared to their private peers supported by better margins, healthy treasury gains, lower operational expenditure, and one-off gains from the United Breweries’ stake sale. Central Bank and Bank of Baroda reported a turnaround from loss to profit. Punjab National Bank reported more than three-fold jump in its standalone net profit to Rs 1,023.46 crore from Rs 308.45 crore in the same quarter last year, primarily due to good recoveries and a drop in operating expenses.

The GNPA ratio of PSU banks rose to 9.71 per cent from 9.69 per cent in the previous quarter. However, PSU banks seem to be losing market share due to lower capitalisation than private banks and risk aversion. Slippages escalated in 1QFY22, leading to rise in non-performing asset (NPA) levels. Private sector banks reported a relatively higher slippage ratio due to the higher share of non-wholesale segment exposure. The gross slippages ratio for private banks was higher and stood at 3.8 per cent as compared to 3.5 per cent for PSU banks.


As an article published by ‘Moneycontrol’ accurately notes, “India as a country is still under-penetrated as far as banking is concerned and there is a huge opportunity across the sub-segments of the industry. India’s retail loans to GDP ratio is less than 15 per cent as against close to 80 per cent for the US and UK. India’s assets under management (AUM) to GDP ratio is also less than 15 per cent compared to more than 100 per cent for the US and close to 70 per cent for the UK. In other categories too, India lags far behind its developed counterparts.” The underlying consumption demand continues to remain robust and should bounce back as the risk of a third wave of the pandemic moderates and the economy opens up.

To quote an excerpt from a report by Emkay Global on the banking and financial sector, “The improvement in collection efficiencies should limit incremental stress formation, while the healthy provision cover should keep provisions in check at least for large private banks. PSU banks, in general, should perform well as the transfer of NPAs to National Asset Reconstruction Company Ltd. (NARCL) should meaningfully lower NPAs and provision burden, resulting in healthy profitability.”

In case of absence of the third wave, the banking sector might continue its outperformance streak in the coming quarters. The latest data plainly indicates decent signs of uptick in credit growth. With the corporate capex cycle picking up pace, high growth for banks could materialise. Banks, either private or public, that have easy access to capital, healthy net interest margins, strong balance-sheet, sound technology infrastructure and solid provisioning for the estimated pandemic-related stress are poised to grow, gain market share and outperform their fellow peers in the long run.

Research Methodology – 

The banks are ranked on comprehensive financial parameters. The financial performances are grouped into five major categories namely size, growth, efficiency, shareholder returns and asset quality. Again these major categories are subdivided into different financial parameters.

While considering size we subdivided it into the size of total assets of the bank, total income, operating profit and net profit. For growth, we have considered the growth in net interest income, operating profit, and balance sheet size in FY21 over FY20. For shareholder returns, we have considered the level of wealth creation achieved by each bank over a period of 1 year. For the most efficient category, we have considered the credit deposit ratio, profit per employee, business per employee and Return on Asset (RoA) for FY21. Finally, for the asset quality, we have taken Net NPA as % to Net Advances in FY21. All the individual parameters are given appropriate weightage to arrive at the final ranking. 

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