Banking Credit Growth September 2021

Indian Banking Sector – Ready to take off

GAURAV SHARMA

 

SEP 30, 2021 / 03:55 PM IST

 
 
 
 
 

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 percent as against close to 80 percent for the US and the UK.

Bank Nifty made another all-time high on September 29, touching a high of 38,377.25 in the morning session. In last one year, the banking index has moved from 21,000 to 38,000 - a surge of around 80 percent - buoyed by robust gains from sectoral heavyweight SBI, which has so far surged 153 percent from its 52 week low of Rs 176.0 to the current price of Rs. 445.0.

The other PSU bank which gave a stellar performance was Bank of Baroda, which has now doubled to Rs 79.4 from its 52-week low of Rs 39. Among the private banks, IndusInd and ICICI Bank have now surged 130 percent and 113 percent, respectively, from their 52-week lows to close at Rs 1,133.0 and Rs 717.0, respectively.

The buoyancy is on the back of a good amount of liquidity in the system, economic stimulus provided by the government, a lower interest rate regime and hoards of first-time retail investors entering the market.

This rally in Bank Nifty has largely been led by retail banks as they have witnessed robust disbursements in housing and auto loans. The stimulus provided by the government because of COVID and the low levels of interest rates have ensured a huge uptick in the retail loan segment – housing, auto, personal, consumer, etc. These have fuelled demand in the economy as well as have improved the margins of the banks. The cumulative net interest incomes (NII) of the banks is also seeing an upward movement. MSME disbursements have also seen a strong growth.

As per the RBI data released in July, disbursements to agriculture and related areas continued to perform well, registering a growth of 12 percent in July 2021 as compared to 5 percent in July 2020.

Retail loans grew 11 percent in July 2021 as compared to 9 percent a year ago, primarily due to higher activity in housing, gold, and vehicle loans. The growth in retail loans is further fuelled by the steps taken by the state governments, especially in the real estate sector, by reducing the stamp duty on property registration. The property registrations in metros like Mumbai and Bangalore are at an all-time high which is driving the home loan disbursements uuphe sector had been an underperformer over the past several years and has been plagued by huge NPAs and poor governance, especially at the PSU banks. The steps were taken by the government over the past several years in terms of consolidation of various PSU banks, capital infusion through recapitalisation bonds, improvement in the governance, and formation of ‘bad bank’ to clean up the books of the banks from NPAs have started turning the things in favor of the Indian banking industry.

Kajal Gandhi of ISec said: “Since 2015, banks were in the cleanup cycle, there was a consolidation of various PSU banks and the credit growth was moderate and AQR was being done by the RBI. Some large private sector banks were also facing issues. All these were impacting the sector's performance. Now, all these legacy issues are behind and asset quality has also improved. The levers are now in place for pick up in credit growth as can be seen on the retail front. The credit growth will pick up further once the Govt. announces its Capex program. Capex from the corporate will still take some time to start. The pickup in demand from the Services sector will also help improve the credit growth on the corporate front.”

Credit growth rate to industry remained docile at 1.0 percent in July 2021 compared to 0.9 percent in July 2020. Within the industrial sector, credit to MSMEs registered a robust growth of 72 percent in July 2021 as compared to a contraction of 2 percent a year ago.

“The credit growth has been a little tepid due to the risk aversion by both the lenders and the borrowers due to the second wave and the imposed lockdowns across the economy. As the economy is opening up, we see steady improvement in credit growth. Credit growth has been close to 6.7 percent, and I believe as we move forward, the banks are trying to push credit through rate cuts. With the arrival of the festive season, bank credit should improve going forward, driven by retail and agriculture while industry and services continue to be slow. We expect credit growth to be in the range of 7.5 percent to 8.0 percent as the economy opens up mainly driven by retail credit and more robust economic activity post the pandemic and improving risk appetite and demand across most product segments,” said Arun Malhotra, founding partner and portfolio manager, CapGrow Capital Advisors.

“Many factors are conducive to driving the credit growth going forward- Commodity prices and improving capacity utilisations, low-interest rates, and adequate liquidity with banks. The focus on manufacturing and Capex through "make in India" and the government's fiscal push, and the willingness to spend driven by more robust tax collections will also help the credit growth. Additionally, the Corporate sector and the promoters have deleveraged and are ready for a new round of capital expenditure and capacity expansions,” Malhotra added.

Going forward, in the near term, the possibility of further write-backs is minimal as most of the banks have already provided for the same at the time of Lockdown 2.0. According to Kajal, “The possibility of any further writebacks is not there. Unless a bank has any account-specific exposure, they will not do writebacks”.

On the positive news in the case of DHFL, lenders backed by SBI are set to recover Rs. 37,400 Cr this week as the deal with Piramal Capital and Housing Finance is set to be completed this month itself. This should add confidence and optimism going forward to the lenders and the sector as a whole.

“Setting up of NARCL-IDRCL is structurally very positive for the banking sector. The GOI guarantee on security receipts provides immediate liquidity and puts the risk-weighted assets in a separate pool managed by the ARC. This move will ensure that a lot of capital is available to the banks for growth as 15 percent of the realizable value will be immediately paid to the banks in the form of cash. Additionally, it will also free up the management bandwidth, and the risk of equity dilution also goes away while there are good chances of higher recovery and faster resolution. The Corporate lenders will be the biggest beneficiary, especially PSUs, SBI, BOB, Union Bank, etc. The private lenders will also benefit from this move,” said Malhotra of CapGrow Capital Advisors.

The government has further strengthened its commitment to resolve the issue of bad assets by approving a bank guarantee of Rs 30,000 crore to back security receipts that will be issued by NARCL-IDRCL to acquire stressed loans.

The actual benefit of this setup for the industry remains to be seen and will largely depend on the resolution of the stressed assets and the efficiency with which they are resolved. But this is a welcome step in the right direction that will improve the health of the sector, its performance and make the banks look leaner and cleaner.

NPA’s of Bank Nifty Banks as at June 30, 2021

"The NARCL will help improve the asset quality of the PSU banks. Even though they are profitable operationally but the bad asset quality and the provision required to be provided, made them look weak. Now they have taken steps to improve governance and the stressed assets will be taken care of to a large extent. Also, the relief to telecom companies for AGR dues will be beneficial for the banks also. All these factors should help the banking sector to take off from here,” said Vishal Balabhadruni at CapitalVia.

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 percent as against close to 80 percent for the US and UK. India’s AUM to GDP ratio is also less than 15 percent compared to more than 100 percent for the US and close to 70 percent for the UK. In other categories too, India lags far behind its developed counterparts.

The ongoing digital transformation can play a pivotal role in improving the penetration of banking products and also the above ratios.

Though there is great optimism about the sector giving robust performance over the next few quarters, one needs to be cautious because once the government will start tightening the monetary policy, there is bound to be a correction that will happen.

“The banking sector has been performing well because of high liquidity and low-interest rate regime. The strong vaccination drive in the country is making things look promising for the economy but the recent statements by Fed about possible taper are prepping the market for the correction that is bound to come once the policy gets tightened. This will hold true for the emerging markets as well. The private sector banks, especially the big ones with healthy books and good governance have performed well and will continue to do so in the future as well. Since investing through Mutual Funds and shares have increased considerably, banks with their own AMCs will perform better and will have better profitability and customer retention,” said Jai Prakash Gupta, founder - Dhan.