Banks post sixth year of profit growth in FY24, bad loans decline further

At the same time, banks resorted to borrowings at higher interest rates and increased deposit rates to bridge the credit-deposit growth gap in FY24

Commercial banks in India reported a sixth consecutive year of rise in their net profits in 2023-24 while bad loans continued to fall, according to the Reserve Bank of India’s (RBI’s) annual publication “Trends and Progress of Banking in India”, released on Thursday.

 

“Banks’ profitability rose for the sixth consecutive year in 2023-24 and continued to rise in H1:2024-25 with the return on assets (RoA) at 1.4 per cent and return on equity (RoE) at 14.6 per cent,” the report said.

 

At the same time banks borrowed at higher interest rates and increased their deposit rates to bridge the credit-deposit growth gap in FY24.

   

Consequently, growth in their interest expenditure outpaced that of their interest earnings, resulting in a deceleration in both operating and net profit growth. The interest expense to interest income ratio increased to 57.4 per cent during 2023-24 from 52.2 per cent in the previous year.

 

An increase of 104 basis points in the cost of funds and an 89 basis point rise in the yield on assets narrowed the spread for scheduled commercial banks (SCBs) during 2023-24.

 

While all banks remained well capitalised, the capital adequacy ratio (CAR) moderated by 30 basis points to 16.9 per cent and Tier-I capital stood at 14.8 per cent at the end of March 2024.

 

The report said the fall in the CAR was due to an increase in risk-weighted assets (RWAs), exceeding the increase in capital funds.

 

The CAR, however, increased to 16.8 per cent as of the end of September, the supervisory data indicated.

 

The minimum CAR requirement for banks in India is set at 9 per cent, and 11.5 per cent including the capital conservation buffer, and the Tier 1 capital requirement is pegged at 7 per cent, both one percentage point above the Basel III requirements.

 

The consolidated balance sheet of SCBs, excluding regional rural banks, increased by 15.5 per cent during 2023-24 (including the impact of the merger of HDFC into HDFC Bank), as compared with 12.2 per cent during 2022-23.

 

The share of public-sector banks in the consolidated balance sheet of SCBs fell to 55.2 per cent at the end of March 2024 from 57.6 per cent at the end of March 2023, with that of private banks increasing from 34.7 per cent to 37.5 per cent.

 

PSBs accounted for 59.3 per cent of deposits of SCBs and 55.5 per cent of advances.

 

Improvement in asset quality, which started in FY19, continued with gross non-performing assets (GNPAs) of SCBs reducing by 15.9 per cent year-on-year to Rs 4.8 trillion as on March 31, 2024.

 

The GNPA ratio declined to 2.7 per cent at the end of March 2024, the lowest in 13 years, from 3.9 per cent in the equivalent period of 2023.

 

During 2023-24, around 44.4 per cent of the reduction in NPAs was attributable to better recoveries and upgrades, the report said.

 

The net NPA (NNPA) ratio declined to a decadal low of 0.62 per cent at the end of March 2024, driven by stronger provision buffers, and further to 0.57 per cent as at the end of September.

 

According to the report, the GNPA ratio remained the highest for the agricultural sector (6.2 per cent) and the lowest for retail loans (1.2 per cent) at the end of September 2024.

 

“The asset quality of the industrial sector has been improving since March 2018, with the GNPA ratio declining to 2.9 per cent at end-September 2024. The GNPA ratio of sectoral credit across bank groups has converged over the years,” the report said.