Margin pressure

Investment revival will boost credit growth

The Q3FY24 results of several private-sector banks indicate trends that may hold across the sector. There’s visible compression in the net interest margin (NIM). Banks also hold higher provisions against exposures to alternative investment funds (AIFs) as mandated by the Reserve Bank of India (RBI). The central bank’s stipulation about assigning higher risk weighting for unsecured loans has started slowing growth. Non-performing assets continue to be under control across most of the private sector at least — most public-sector banks are yet to declare results. IndusInd Bank is somewhat of an exception since it has high exposure in Tamil Nadu and collections there were affected by unseasonal rain and floods. However, this doesn’t appear to be a structural problem and rates of collection and recovery are expected to pick up.

Credit growth has been good for most banks. Expansion in retail credit and loans to small and medium-sized enterprises have generally outpaced corporate credit. Since overall credit growth has exceeded that in deposits in general, banks are now obliged to pay higher deposit rates to attract more funds. This is one underlying reason for the compression in the NIM, although most private banks have kept it within 50 basis points. Higher risk weighting for unsecured loans hurts lending in areas such as credit card revolvers and personal loans, which are high-growth and high-yield. This may, therefore, lead to lower growth in net interest income (NII) in the future. The HDFC Bank finances are an outlier. The merger gives the erstwhile HDFC access to low-cost funds. However, it may take a while before other benefits of synergies kick in. At any rate, the market was disappointed with the Q3 results of India’s largest private bank.

So far as non-interest income is concerned, that from the treasury has been low. This is not surprising since the policy rates remained unchanged and the rupee did not fluctuate much. Hence, bond yields were more or less stable. Operating costs have edged higher as banks have opened branches due to the highly competitive scenario. One area of interest is retail mortgages, where banks are going head-to-head with specialised non-banking financial companies. The recent policy action of the RBI has affected profits due to new AIF provisions. The management commentary at mo­st private banks, however, appeared confident. Credit demand is expected to continue to grow. Banks are betting the RBI will align its thinking with the somewhat dovish stance of the Fed and start cutting policy rates more or less as soon as the Fed does.

But so long as the monetary policy remains tight and credit-deposit ratios inch up, the compression in the NIM may continue. Guidance from several majors implies a further squeeze in the current quarter though the extent of that will not be high. A pickup in demand for corporate credit is awaited. This would compensate for a slowdown in retail-credit expansion. Theoretically, improving capacity utilisation should lead to an increase in corporate investment. The overall early corporate results, however, indicate that profit growth has not been high. The Bank Nifty, which is populated mainly by private banks, has underperformed in the past one month as investors have been unenthusiastic. Performance in the near team would depend on corporate credit picking up and monetary policy expectations. The Union government’s fiscal stance will also determine the near-term outlook.

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