Supporting growth

Healthy bank balance sheets will enable investment

Reserve Bank of India (RBI) Governor Shaktikanta Das this week asked the directors of public-sector banks (PSBs) to further strengthen their governance and assurance functions, such as risk management and internal audits, so that they are able to identify and mitigate risks early. He also emphasised the need for PSBs to ensure continued financial and operational resilience. Notwithstanding this appeal for further improvement, the RBI would be pleased with the banking sector’s performance during a difficult year. The FY23 results of 37 listed commercial banks, including PSBs, indicate they have in aggregate managed the remarkable feat of improving the quality of their balance sheets, while expanding credit disbursement and generating much higher profits in a financial year that saw sharp interest rate hikes.

Part of this is perhaps due to the continued recovery of economic activities despite high inflation. It is also true that banks can, in general, profit during the early stages of a rate-hike cycle by increasing their lending rates while holding deposit rates. Their net interest margins (NIMs) — the difference between the interest rate a bank charges and the interest rate it pays — expand until such time as they are forced to raise deposit rates. Such caveats notwithstanding, this sample, which includes all the large private banks as well as the PSBs, has delivered a commendable performance. Credit disbursement is up an impressive 21 per cent, year on year, in FY23, rising to over Rs 14 trillion versus FY22, when it was at Rs 11.92 trillion. Fee-based incomes are up very little — just 2 per cent — hence, the profits have been driven clearly by the loans business. Net interest income (NII) is up by 23 per cent, which implies that the NIMs have increased (since NII has outperformed credit expansion).

However, deposits are up only 10 per cent and, therefore, the credit-deposit ratio is tightening. The ratio is now at 78 per cent, as against 74 per cent in FY22, and banks have started raising deposit rates since they need to attract more money to continue lending at this pace. So, there is likely to be normalisation in the NIM over the next few quarters unless the central bank decides to loosen its monetary policy and cut interest rates. Net profits were up 41 per cent YoY but what’s under the hood is even more impressive. Banks have collectively managed to reduce gross non-performing assets (GNPAs) to around 4 per cent of advances from 6.6 per cent in FY22. They have also managed to hold net NPAs (NNPAs) to 1 per cent of advances, down from over 2 per cent in FY22. GNPAs and NNPAs have declined considerably in absolute terms, and banks have been able to reduce provisioning for bad debts substantially as a result.

There are several positives from this performance. The strong credit expansion does indicate there is strength in the apparent economic revival. Also, the lowering of NPAs shows there is overall less distress in the economy since loans are being serviced, and banks have improved their monitoring and collection methods. This means the financial sector is well placed to support further economic expansion. A sustained pick-up in corporate investment, which is essential for durable economic expansion, would now depend on the medium-term domestic and global economic outlook.