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RBI concerns over Small Finance Banks
Banking, Equities, Markets - January 30, 2025

RBI concerns over Small Finance Banks

RBI concerns over Small Finance Banks

Overview
It has been reported that the Reserve Bank of India (RBI) has become uneasy about a few small financing banks (SFBs) because of increased asset quality stress and excessive concentration risks.

According to three executives monitoring the industry, the banking regulator has also instructed these banks to look into mergers in order to increase their size and reduce the risks of concentration. According to one of the individuals, the RBI has “close supervision” over small finance institutions. Additionally, one solution that has been considered at the regulatory level to alleviate the issues is bank consolidation.

According to another executive, the regulator met with these lenders’ management a few months ago. The supervisory stakeholders were also concerned about gaps in succession planning and corporate governance at several of these SFBs.

NPAs on the rise
Due to the continuous strain in the microfinance industry, which saw the average gross non-performing assets (NPA) increase to an 18-month high of 11.6% at the end of September 2024, small financing institutions with a larger percentage of microloans are in the most difficult position.

Collectively, non-performing assets (NPAs) accounted for 15.3% of these lenders’ total microlending portfolio. Although industry-level data until the end of December is not yet available, quarterly results indicated that the overall sectoral asset quality is probably going to deteriorate.

Concentration Issues remain persistent
Concentration issues affect small financing banks in two ways. First, a lot of people are heavily exposed to the microfinance industry, which has been experiencing a lot of stress. Second, a small number of these banks are highly exposed to areas of greater stress.

According to the CEOs of major firms, these problems might be resolved by combining these banks or by merging with larger organizations that have substantial financial resources. Further, as per a prominent microfinance practitioner, it might make sense for banks that operate in different regions to merge since it would mitigate the concentration risk.

A Standing External Advisory Committee (SEAC) was previously established by the RBI to review applications for Small Finance Banks (SFBs) and Universal Banks. The Reserve Bank of India’s Department of Regulation would provide the committee with secretarial support, the RBI had stated in a release.

Category Risks
Coming to category risks, for example, ESAF Small Finance Bank’s native state of Kerala and its neighboring state of Tamil Nadu account for 57% of its gross advances, with unsecured loans accounting for 56% of the total. In a similar vein, Utkarsh Small Finance Bank has 916 banking locations spread over five states: Uttar Pradesh, Bihar, Jharkhand, Odisha, and Maharashtra. Of these, two-thirds of total loans fall into the category of unsecured microfinance.

That area is the primary focus of the Northeast Small Finance Bank, which combined with the fintech startup Slice, based in Bengaluru.

The majority of SFBs reported yearly increase in deposit mobilization that was higher than the average for the banking sector. Despite starting from a low foundation of Rs 6,484 crore a year ago, Suryoday leads the field with a 49.7% year-over-year rise to Rs 9,708 crore at the end of December.

In the third quarter, the bank’s gross non-performing assets (NPAs) increased to 5.5% of its total advances of Rs 9,563 crore. While lending increased 16% to Rs 19,057 crore, Utkarsh recorded a 33.5% year-over-year increase in deposits to Rs 20,172 crore.

The SFB ecosystem was established by the RBI to improve loan availability to micro and small businesses as well as the agricultural industry.

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Renewable Energy Sector Awaits Budget 2025 for Key Support Measures

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Liquidity is a major concern in the Indian Banking Sector
Equities, Markets - January 28, 2025

Liquidity is a major concern in the Indian Banking Sector

Liquidity is a major concern in the Indian Banking Sector

Overview
Following the sharp decline in a crucial liquidity metric, Indian lenders have requested that the central bank inject long-term cash into the banking sector, according to six treasury officials. The liquidity management framework of the RBI has emerged as a major worry for corporates, NBFC executives, and bankers alike. Interest rate negotiations, which have historically dominated conversations between the central bank and the government, have been overshadowed by tight liquidity, a crucial concern. Given the strain on the system, the RBI should review its strategy for managing liquidity to make sure it still reflects the state of the economy and the financial system.

The RBI must provide liquidity support to maintain smooth credit flow in the face of persistent liquidity constraints in the country’s banking system. Although open market operations (OMOs) are a common method of introducing primary liquidity, structural and legal issues limit their usefulness in the present situation.

Liquidity Tightening: A rising concern
A daily liquidity shortage of more than Rs. 1 lakh crore has been present in the interbank market (LAF system) since December 16, surpassing Rs. 2 lakh crore on a regular basis since January 4, and reaching Rs. 3.3 trillion on January 23, 2025—the biggest amount since 2010. Furthermore, by late December 2024, total liquidity—including government cash balances—had drastically decreased from a surplus of Rs. 3- 4 lakh crore during the previous two years to barely Rs. 64,350 crore.

Causes of Liquidity Crunch
The RBI reduced its foreign exchange reserves from over $700 billion in October to $623 billion by mid-January 2025 as a result of selling large amounts of dollar reserves to counteract the rupee’s decline brought on the aggressive inflows of foreign funds. Equivalent rupee liquidity has been removed from the system as a result of these dollar sales. In January alone, foreign portfolio investors sold $8.2 billion worth of Indian stocks and bonds, reversing the $1.8 billion in inflows in December and significantly depleting liquidity.

Additionally, the change in asset allocation patterns is a major element causing liquidity issues. Bank fixed deposits have been replaced by investments in insurance, PFs, and pension products due to tax benefits. These vehicles make significant investments—more than 60–70%—in government securities (G-Secs) and State Development Loans (SDLs), in contrast to banks, which devote about 75% of their resources to the private sector. Due to institutional investments that disproportionately benefit the government or PSU sectors, this change has increased the cost of funding between SMEs and MSMEs. OMOs by themselves are unable to adequately meet systemic liquidity demands when banks’ contribution to government funding declines.

Steps taken by RBI
In order to inject Rs.1.13 trillion into the system, the RBI lowered the Cash Reserve Ratio from 4.5% to 4% on December 8. By January 20, the daily repo will have increased from Rs. 50,000 crore to Rs. 82 lakh crore. FX swaps and longer-term repos have also been used. The total value of the open market operations (OMO) was Rs.10,000 crore. Systemic and structural issues are the reason why the liquidity shortfall continues in spite of these steps.

Structural Challenges to Liquidity Management and Tools

OMO Challenges
The ability of banks to offer excess government securities to the RBI determines how successful OMOs are. However, banks lack the flexibility to effectively participate in OMOs because they are operating near their minimal Liquidity Coverage Ratio (LCR) criteria. OMOs give institutional investors the ability to tender bonds to the RBI in return for cash, such as insurance firms and provident funds (PFs). However, unless bondholders turn their holdings into bank deposits, this liquidity inflow has little direct effect on the banking system. As a result, OMOs frequently cause government bond yields to drop precipitously without giving banks a corresponding increase in liquidity.

Institutional investors may further disintermediate the banking system if they reallocate the funds to corporate bonds. As a result, banks’ deposit growth would be constrained, and credit and deposit expansion would both decline. Businesses that rely on bank loans, such as retail borrowers, MSMEs, and SMEs, are disproportionately affected by this situation, which keeps their cost of financing constant. The gap between high-quality borrowers and the whole economy is widened as AAA-rated corporations and government bonds profit from declining yields.

Rate Cut Issues
The RBI’s rate cuts are unlikely to have the desired effect until structural liquidity concerns are addressed. High deposit costs prevent banks from efficiently passing rate reductions on to customers. Therefore, rate cuts run the danger of being ineffectual in the absence of specific actions to reduce banks liquidity.

Other Crucial Challenges
The transition to a just-in-time payment system for state funding has resulted in idle government cash sitting outside the banking system, which brings us to the issue of unspent government balances and liquidity management. Interest rates are rising as banks like SBI, which formerly depended on government deposits, compete for customer deposits. Additionally, when the bank replaces maturing loans with new deposits, the HDFC-HDFC Bank merger has boosted competition for deposits. The FD to Mutual Fund Shift is another important aspect as bank FD holders progressively switch to mutual funds, the demand for long-term FDs declines. Furthermore, banks are being forced to hold more idle cash as a result of the unexpected needs for liquidity brought on by the quick adoption of UPI, NEFT, and RTGS.

Conclusion
The RBI must investigate fresh and creative instruments to promote banking system liquidity and encourage wider credit expansion. In addition to CRR changes, strategies like buy-sell FX swaps, long-term repo operations (LTROs), or dynamic modifications to LCR rules could guarantee liquidity flows to the most vulnerable industries. In summary, resolving the lack of liquidity in India’s banking sector necessitates a multipronged strategy that takes into account structural changes, regulatory adjustments, and creative liquidity solutions. The RBI can guarantee fair access to credit and promote sustainable economic growth by reorienting its policy instruments to the changing financial environment.

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Budget needs to focus on local infrastructure

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Easing of risk weights on loans given to MFIs and NBFCs
Equities, Markets - January 27, 2025

Bank Results highlight issues in the banking segment

Bank Results highlight issues in the banking segment

Overview
Earnings season has begun, and as usual, the performance of the banking industry provides insight into the overall health of the economy and underlying patterns in the payback cycle. The December figures thus far suggest that the industry is under underlying pressure.

IDFC First Bank’s profit slides
For example, IDFC First Bank’s quarter has been uneventful, with a notable 52.6 percent year-over-year drop in net profit at Rs 339.4 crore. The decline has mostly been ascribed to a downturn in the microfinance industry and an increase in wholesale banking’s market share, both of which have had an impact on the lender’s net interest margin (NIM).

Even though the bank’s net interest income (NII) increased 14.4% to Rs 4,902 crore, it is evident that certain business model and operational issues are plaguing the bank. Notwithstanding the difficulties, the rise in core operating profit (up 15 percent) and operational income (up 15 percent) suggests a strong base performance.

The shift in IDFC’s microfinance business appears to be the fundamental problem. The bank may eventually take advantage of operational efficiencies as its scale grows as it shifts to universal banking, which includes branching out into areas like wealth management, corporate banking, and credit cards. Despite its short-term difficulties, the microfinance shift brings to light the difficulties in sustaining profitability while striking a balance with adherence to regulatory standards such Priority Sector Lending (PSL) for underprivileged sectors.

ICICI Bank’s margin suffers
At Rs 11,792 crore, ICICI Bank’s net profit increased by 15% year over year. The second-largest private bank by assets in India may also be suffering margin compression, as evidenced by the minor drop in NIM from 4.43 percent to 4.25 percent, despite a 9.1 percent increase in net interest revenue to Rs 20,370 crore. This is especially noteworthy because the Indian banking sector is under pressure from both increased competition for customer deposits and inflationary cost rises.

Despite a slight decline in its gross non-performing assets (NPA) percentage, ICICI Bank’s steady asset quality indicates a robust business strategy. Given the seasonal stress in the Kisan Credit Card portfolio, a vital component of rural credit, the 17% increase in provisions indicates a responsible strategy in light of bad loan risks.

HDFC Bank’s asset quality drops
The earnings of HDFC Bank also indicated deterioration on asset quality a few days ago. The third quarter’s gross non-performing assets (GNPA) climbed 16 percent to Rs 36,019 crore from Rs 31,012 crore in the same period last year. From 1.26 percent the year before to 1.42 percent, the GNPA ratio increased by 18 basis points (bps). The net non-performing assets (NNPA) ratio increased 15 basis points to 0.46 percent from 0.31 percent YoY, while NNPA itself surged 51 percent to Rs 11,588 crore. The quarter’s provisions decreased by 25% from the same period last year, from Rs 4,217 crore to Rs 3,154 crore.

Faults in the Banking Sector
These figures highlight both potential and problems for the banking sector as a whole. The emphasis on high-margin assets is increasing, but as the economic and legal environment changes, niche markets like microfinance encounter difficulties. It is anticipated that the theme of pressure on margins from growing interest rates and heightened competition for retail deposits would persist.

Banks face two challenges: maintaining strong deposits and managing the slowdown in lending growth due to dampened demand. There are concerns regarding the reasons behind the decline in credit growth. In order to reduce their credit-deposit (CD) ratios, banks may be purposefully limiting loan expansion. The Reserve Bank of India has cautioned against this practice because of the hazards involved. Over-leveraging and possible trouble fulfilling commitments may be indicated by a high CD ratio.

On the other hand, the slowdown can be the result of lower credit demand in particular markets. Significant drops in personal and service loan credit growth are shown in data from the prior year, which may indicate a slowdown in economic activity in these sectors. In terms of deposit growth, banks have increased their attempts to attract investors by raising deposit interest rates.

Budget to reduce NPAs to strengthen the banking sector
Without addressing the problem of non-performing assets (NPAs), which has afflicted the Indian banking industry for many years, Finance Minister Nirmala Sitharaman cannot implement any reforms. A favorable trend is seen in recent statistics from the Reserve Bank of India’s (RBI) Financial Stability Report (December 2024), which shows that gross non-performing assets (NPAs) for scheduled commercial banks decreased from 3.9% in March 2023 to a 12-year low of 2.6% in September 2024.

Achieving significant reforms will depend on taking lessons from the past and avoiding repeated inefficiencies. The budget’s suggested actions can lower non-performing assets (NPAs) and pave the way for long-term financial stability and economic growth if they are implemented with a comprehensive strategy. Since the Indian economy shows promise for the future, this budget would be crucial because, in addition to financial institutions like banks, NBFCs, ARCs, and AIFs, private credit players and international distressed funds are also closely monitoring this area in the hopes that the sector’s full potential will be realized.

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Budget needs to focus on local infrastructure

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Interest Payment Burden to reduce in FY26
Business, Equities, Markets - January 22, 2025

No requirement of capital investment in state-run banks in the Budget 2025

No requirement of capital investment in state-run banks in the Budget 2025

According to the Reserve Bank of India (RBI) regulations, banks in India are required to maintain a Capital to Risk-Weighted Assets Ratio of atleast 11.50 percent. It aims to maintain capital adequacy in the banks in order to fulfill financial commitments as well as to mitigate financial losses. It is to give protection from various risks such as operational risk, credit risk, and market risk.

Most of the public sector banks in India not only fulfill the criteria but also have CRAR of around 16 percent and more as well.

Capital Adaquecy of Public Sector Banks
In the month of December 2024, the Bank of Maharashtra’s CRAR is about 18.71 percent which is the highest record in between all the public sector banks in India. While, the position of lowest capital position is held by Bank of Baroda. It has a CRAR of about 16.26 percent. Even the lowest CRAR fulfills the criteria of RBI’s capital adequacy regulations.

Overall, it indicates state-run banks are not in need of capital financing at this point of time.

Asset quality of Public Sector Banks
In recent times, asset quality of state-run banks is not risky. In the month of September, 2024, their ratio of gross non-performing assets fell to 2.6 percent of the total credits. As per the recent report of RBI’s Financial Stability, it is the lowest record compared to the records of the previous 12 years. While, the net non-performing assets ratio is close to 0.6 percent.

Financial health of Public Sector Banks
The macro stress tests conducted on Public Sector Banks indicates that these banks have the strong capability to tackle stressful situations. In the month of September, 2024, public sector banks’ capital adequacy was about 16.60 percent. It indicates their strong financial health. It also hints that it is improbable for the Union budget 2025 to provide capital financing for state-run banks in India.
Probability of Capital Investment in Public Sector Banks
In the past, the government of India has often taken an initiative of providing capital investment to state-run banks. In the previous 10 Union Budgets of India, the government of India has given capital investment to public sector banks for about three times. The total capital financing accounts to Rs. 3.35 lakh crore.

The main purpose of these capital investments in the state-run banks is to fulfill the regulations. It is also to maintain strong credit growth. It is important to maintain credit growth as it helps to expand the scope of lending to businesses and people. It results in boosting economic growth. This purpose of boosting credit growth is important in state-run banks compared to private sector banks.

Apart from the funding through the Union Budget, state-run banks were able to get capital financing from the Indian government. It got capital investment of about Rs. 20,000 crore in the financial year 2022. In this same financial year, four state-run banks in India got capital financing of about Rs. 14,500 crore in the month of March. This financing was done with the use of pure discount bonds.

The overall financial health of public sector banks indicates that the budget 2025 may not have new capital investment for public sector banks in India.

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Solid reason for GST reduction on two-wheelers

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Easing of risk weights on loans given to MFIs and NBFCs
Banking, Business, Equities, Markets - January 15, 2025

India plans to divestment of 5 public sector banks

India plans to divestment of 5 public sector banks

The Indian government might allow divestments of state-banks through the process of stake sales or the lenders selling their own shares to large investors. It will help banks to meet requirements of minimum public holding.

The Indian government could possibly allow public sector banks such as the Central Bank of India, Punjab and Sind, Bank of Maharashtra, UCO Bank, and Indian Overseas Bank to lower ownership stake through share sales under the authority of Department of Investment and Public Asset Management (DIPAM). The second option is banks selling their shares to large investors.

Purpose of divestment
The aim of the divestment is to decrease the government’s holding in these state-run banks to lower than 75 percent. It will improve banks’ cash flows and financial stability. It helps in increasing liquidity of these lenders. These banks’ ability to lend can increase due to this. It will ultimately support in increasing the liquidity and credit creation capacity in the midst of economic uncertainty. According to the analysts, the asset quality of the banking sector has reached its high in the midst of the slowdown in economic growth.

Current government holdings
According to the data of the December 2024 quarter, the government’ stake is about 79.6 percent in the Bank of Maharashtra. While, the government holdings in the Central Bank of India and UCO bank is about 93.1 percent and 95.4 percent, respectively. The government ownership in PSU banks such as Punjab and Sind Bank and Indian Overseas Bank is about 98.3 percent and 96.4 percent, respectively. The total excessive government ownership in these following five state-run banks is close to Rs. 50,000 crore on the basis of the current share price.

Shares of State-run Bank’s Performance
When the news was circulated about the possibility of stake sale of five PSU banks, it led to the shares of the PSU banks surged to 20 percent. While the stocks of Indian Overseas Bank rise to about 19.24 percent. Also, the stock of UCO Bank surged to around 20 percent since October, 2003.

In the previous year, bank stocks observed an indifferent trend. Despite this, investors showed their interest in public sector stocks. The Nifty PSU bank index increased close to 4 percent in the previous twelve months compared to the fall in the NSE Nifty Private Bank index to around 3.6 percent.

According to the price-to-book metric, shares of these five state-run banks are not inexpensive compared to its other bigger peers. Price-to-book is a common financial metric used for comparing a company’s market value with its book value for the purpose of the valuation of the company.

The largest state-run bank of India is State Bank of India (SBI), which accounts to a price-to-book value of 1.44 times. As per the data of Bloomberg, the range of book value is 1.43 to 3.62 times for the five selected state-run banks – Bank of Maharashtra, Indian Overseas Bank, Punjab and Sind Bank, Central Bank of India, and UCO Bank.

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Railway Sector’s Budget Allocation and Stock Performance: Insights for Investors

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Banking, Business, Equities, Markets - January 15, 2025

Government’s decision on Privatisation of banks in the upcoming Budget 2025

Government’s decision on Privatisation of banks in the upcoming Budget 2025

Overview
In India, the government has the largest ownership in the banks. This biggest stakeholder position is the result of two phases of nationalisation. The first nationalisation occurred in the year 1969 in which 14 banks were nationalized which includes Bank of Baroda, Bank of India, and some other banks. While the second phase occurred in the year 1980 in which around 6 banks were nationalized which includes Punjab and Sind Bank, Andhra Bank, and some other banks. In present times, there are 12 nationalised banks as many banks merged together over the period of time.

The primary aim of the government was to achieve financial inclusion in banking services by reaching services to the country’s underbanked and unbanked population.

The matter of concern is about whether the major stake of the Indian government in these banks should remain the same. In the financial budget of 2021-22, Finance Minister Nirmala Sitharaman announced plans of two public sector banks and one insurance firm to be privatised. Despite this, the privatisation promise is yet to be fulfilled.

Current Ownership of government in Banks
In present times, the government still holds a major ownership in these 12 nationalised banks, with more than 90 percent of ownership in four banks. The names of these four banks are Punjab and Sind Bank (98.25%), Central Bank of India (93.08%), UCO Bank (95.39%), and Indian Overseas Bank (96.38%).

Push to Bank Privatisation plan
If the government is serious about the bank privatisation plan, then it should start the process in the Budget 2025. The privatisation process of IDBI is already going on and is expected to be completed by the financial year 2026. This privatisation alone is not enough if the government really wants to achieve reforms in the banking sector. Also, if the actions are not taken then it will miss significant reforms in the upcoming five years leading to hindering the progress of the banking sector in India.

Government Actions
In the past, both United Progressive Alliance (UPA) and National Democratic Alliance (NDA) have promised privatisation of banks as their top priority in their agenda of reforms. Despite this, no actions were taken. In the financial year 2019-20, a mega-merger of 10 public sector banks took place resulting in formation of 4 banks. The IDBI bank was suffering from poor financial health. In the year 2019, the government took the initiative to purchase shares in the IDBI bank, along with the Life Insurance Corporation of India (LIC). This was done to improve the financial health of the bank. These are only actions so far taken by the government of India.

Challenges in privatisation of banks
The public sector banks suffered from legacy issues for a long period of time. The employee trade unions in these banks are strongly influenced by politics. Also, the working environment here is just like a government office working environment. It is totally different from the modern and dynamic working environment of the private sector banks. These challenges could act as an issue for a serious buyer. The reason is that the buyer should be willing to deal with these issues and able to make necessary changes.

Privatisation of banks is quite a difficult and risky political situation for the government as well. The public sector banks involved the issue of regional interests as each bank has a strong presence in certain regions. The topic of privatisation of these banks may not be liked by people living in those regions. This can become a sensitive topic because no government can take a risk of political backlash.

Due to these regional and political issues, it is difficult to implement this plan in action. Despite this, it is upto the government and its budget 2025 to decide if they can work on a bank privatisation plan.

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NBFC & HFC Loan Growth to Slow in FY25 Amid Softer Demand and RBI Norms

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Easing of risk weights on loans given to MFIs and NBFCs
Banking, Business, Equities, Markets - January 14, 2025

The Unfolding Battle: Banks Intensify FD Rate Hikes Amid Rising Deposit Demand

The Unfolding Battle: Banks Intensify FD Rate Hikes Amid Rising Deposit Demand

In recent times, banks have been engaged in a competitive battle to attract depositors, particularly as Fixed Deposit (FD) rates continue to rise. The higher rates reflect not only increased demand for capital but also tighter liquidity conditions. Banks, seeking to bolster their balance sheets, have ramped up deposit offerings in response to both internal funding needs and external pressures, such as rising interest rates set by the Reserve Bank of India (RBI).

For depositors, this environment presents an attractive proposition: higher returns on FDs compared to traditional savings accounts. However, these rate hikes signal more than just a win for savers. They reflect a broader economic picture where inflationary concerns, a tight monetary policy, and rising borrowing costs are impacting the financial ecosystem.

Impact of Rising Rates on Banks and the Economy
While the FD rate hikes may provide short-term benefits to depositors, they pose challenges for banks, particularly in terms of margin compression. Higher deposit rates mean increased costs for banks, which could result in tighter profit margins. As banks strive to keep up with one another’s offerings, the increased pressure to offer attractive rates may lead to a shift in lending strategies or a reduction in loan volume. The implications for businesses and consumers could be far-reaching, with costlier loans potentially affecting economic growth.

Furthermore, the competition for deposits might intensify as non-banking financial companies (NBFCs) and small finance banks also enter the fray, vying for a piece of the deposit pie. This heightened competition, combined with the potential for interest rate hikes by the RBI, underscores the volatile nature of the financial market.

Strategic Implications for Investors and Businesses
For investors, rising FD rates can be seen as a safer avenue to park funds, especially amid market volatility. Fixed deposits, once considered low-yielding, have become more competitive, offering attractive interest rates that provide a buffer against inflation. However, the upward trend in FD rates also presents an opportunity for investors to reassess other asset classes like equities, real estate, and bonds, all of which might yield higher returns, depending on market conditions.

In the longer term, businesses looking to raise capital may face a more challenging environment, as higher FD rates could lead to an increased cost of funding. Companies heavily reliant on debt might experience higher borrowing costs, impacting profitability and expansion strategies. At the same time, the upward movement in deposit rates indicates a potential tightening in credit conditions, which could further strain liquidity in the economy.

Conclusion: A Balancing Act for Banks and Investors
The rising FD rates represent a crucial development in the Indian banking sector, where competition and shifting monetary policies are driving up deposit costs. For banks, the increased cost of funds might pose challenges to profitability, while savers benefit from the elevated rates. Investors and businesses, meanwhile, should stay vigilant, carefully evaluating their financial strategies in the face of tightening credit conditions and potentially higher borrowing costs.

The “war” for deposits is far from over, and as the financial landscape continues to evolve, both banks and investors must navigate this changing terrain, balancing risk and reward to ensure sustainable growth.

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NBFC & HFC Loan Growth to Slow in FY25 Amid Softer Demand and RBI Norms

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Decentro Secures ₹30 Crore to Power Fintech Innovation
Business, Equities, Market News, Markets - January 6, 2025

Credit Growth Expected to Slow as Provision Costs Rise

Credit Growth Expected to Slow as Provision Costs Rise

Recently, the credit rating agency ICRA, an affiliate of Moody’s Investor Services slashed credit growth rate outlook for the Indian banking sector. The newer revised outlook for credit growth predicts that the loan growth would witness a slight slowdown to 10.5% to 11% for the fiscal year ending March, 2025. The revision is a reduction from the previous forecast of 11.6% to 12.5%. Primarily, the cause behind this alteration includes a sharp decrease in the lending segment in particular sections such as unsecured retail borrowers and NBFCs. When it comes to NBFCs, the credit growth decelerated to 7.8% year-on-year when compared to 19% for the previous year. RBI in November, 2023, increased risk weights on bank credit to NBFCs, prompting these institutions to diversify the source of their funding. Therefore, as these specific segments carry higher yielding returns but at the same time carry even higher risks, banks have become increasingly cautious when it comes to their lending practices.

Lending or credit growth by Indian banks slowed for the fifth consecutive month in November, up 11.8% year-on-year from 16.5% in November 2023. Including the impact of the HDFC Bank merger, credit growth stood at 10.6% compared to around 21% for the previous year. This moderation in credit growth follows the actions of the Reserve Bank of India to curb excessive lending on unsecured loans. Credit growth had also slowed in the previous months (October, July, August and September). Despite this slowdown, banks continue to report double-digit growth, supported by high retail demand and urban infrastructure. Furthermore, banks are now focused on improving their already high credit-to-deposit (CD) ratio. ICRA has stated that the loan growth will further decrease to 9.7% to 10.3% in the fiscal year ending March, 2026. This reduction would be a result of trimming CD ratios by the banks and the alteration in the implementation of changes in the liquidity coverage ratio framework which would kick in next fiscal fiscal year.

Bank margins would take a hit with consistently higher interest rates and a gradual slowdown in credit growth, said Sachin Sachdev from ICRA. As the primary source of bank margins are through disbursing of personal loan and other unsecured loan products, a significant reduction in the volume of such loans would definitely impact overall profitability of the bank. Further if the interest rates continue to decline in the future, banks could suffer with stagnant profit figures as the range between the lending and borrowing rate would grow narrower.

ICRA further stated that bank margins would be impacted by rate cuts which accelerate yield transmission. On the other hand, banks’ return on asset (RoA) is expected to stay in good health lying in the range of 1.1% to 1.2% for FY2026 and 1.2% to 1.3% for FY2025 when compared with 1.3% for FY2024. Additionally, with slower credit growth, banks would witness enhancement in loss absorption capacity with bolstering growth needs. Thus, banks would lend less aggressively and improve their reverses and manage high risks associated with high risk lending segments.

Banks’ balance sheets would be further stretched by the impact of the implementation of expected credit loss (ECL) framework and increased provision for medium term project financing. The ECL framework would require banks to set aside provisions for bad loans way earlier than they currently do. This would significantly improve transparency and risk management but at the same time increases financial burden on banks for short-term. Additionally, banks would be required to set aside higher provisions for project finance, particularly in infrastructure and large-scale projects. As a result, these provisions put pressure on banks’ financial resources, affecting the overall profitability including bank margins.

To handle and offset these challenges in the banking space, Indian banks are turning to the bond market to raise funds. Sachdev further elaborated that due to difficulties in attracting deposits, banks are now shifting strategies for fundraising and are expected to issue bonds at an increasing rate in the near future. Sighting this, banks are expected to surpass their previous high and could touch Rs. 1.3 trillion for FY2025 when compared to Rs. 1.02 trillion for FY2024.

Coming to the retail space, with the increasing stress, the fresh slippages by banks are on the rise while recovering are expected to slow down. The gross fresh NPA generation by banks is expected to increase slightly to 1.6% in FY2025 from 1.5% in FY2024 which still remains way lower than previous years. Eyeing this situation, gross NPAs would rise and correlatively GNPA ratio would also rise in FY2026.

Lastly, ICRA emphasized that although NPA generation rate is set to pick up, credit costs would likely only rise slightly due to lower legacy net NPAs. To improve banks’ bottomline, with higher current provision coverage ratio (PCR), banks would have more room to lower incremental provisions. Coming to numbers, credit expenses account for upto 21% to 23% of the operating profit of the banking sector in FY2025 and 27% to 30% in FY2026

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TCS Unveils Pace Studio in Philippines to Boost Digital Innovation

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Business, Equities, Market News, Markets - January 3, 2025

Resilient Banks Face Cost Challenges Beyond Technology

Resilient Banks Face Cost Challenges Beyond Technology

Banks are the cornerstone of the financial sector at the national as well as global level. To maintain stability, banks need to maintain liquidity and stable profit margins. Currently Indian banks are facing the issue of profitability margins and operational costs. In 2025, Indian banks are expecting the Reserve Bank of India to issue final guidelines on the number of subjects related to compliance. For this, the draft has already been circulated by the RBI. The subjects taken into consideration range from higher provisioning on project finance, higher run-off rates for liquidity coverage ratio (LCR), climate-related financial risks, and focus on credit management models. The critical issue banks face is credit risk due to Non-Performing Assets (NPAs). The RBI is also going to address this issue and also other risks that banks often faced affecting their books. The Central Bank also focuses on issuing guidelines related to restricting banks and their subsidiaries from performing overlapping businesses.

RBI focusing on these different subjects related to Banking function indicates that the year 2025 would be a challenging year for Indian Banks. It will lead to a rise in compliances and its cost. Also compression in margins due to stagnant deposit growth, competition for fee business and issue of operational cost. Despite progress in technology in the banking sector, it is difficult to lower operating costs. Resulting overall pressure on profit margins. Aso if the economic growth remains stagnant, it will affect other incomes of banks such as guarantees and commissions.

According to banking analysts, the banks have good capital structure and the NPAs’ share is at decadal low. Also they hope that the banking and financial institutions will not face any kind of severe shocks in this year. Despite this postive situation, the increasing number of Cyber frauds will keep the banks in constant tension.

The Indian banks are already facing the issue of less net interest margins (NIM). The NIM is the difference between the interest payment on deposits (cost of funds) and interest charged to borrowers. NIM also acts as a key indicator of a bank’s earnings. Last year, the NIM was narrowed down by 50 bps. According to RBI’s latest Trend and Progress of Banking Report, banks’ earnings based on NIM as key indicator was at 3.5 percent at the end of September 2024 as compared to 4.1 percent in the previous year for all the commercial banks. The guidelines of RBI that will be implemented in 2025 will likely lead to an increase in regulated banking structure as it will aim at making banks financially strong and more accountable and transparent. Despite this, it will certainly affect the performance of the banks. As the pressure on profitability margins is increasing due to rising credit cost and capital requirements in high-yield sectors such as unsecured loans. It could lead to banks to shift to more secured retail and corporate lending. The capital requirements are high in unsecured loans due to lack of collateral, higher risk of defaults, and has to follow regulatory requirements stated by RBI.

Increased use of technology in banking functions such as implementation of KYC norms, block chains for smooth transactions and use of technology for giving other customer services is observed in the banking sector. The aim of using technology was not only to make the banking process hassle-free for customers but also to lower the operational costs banks faced while performing banking activities. Despite the increased use of technology, the banks are expected to face high operational costs due to technology failing to replace humans as resources. Reason for this is that advanced technologies are complex and expensive in nature. It requires not only to invest in infrastructure but also to employ skilled professionals to manage these technologies. Also implementation of technologies need extensive training of the employees which comes with a cost. The functions like deciding the creditworthiness of the borrowers and amount of loan and interest rate to be given cannot be solely decided on the basis of data analyzed. It needs human perspective and strategies. Also many customers still prefer human interactions in terms of grievances and help while going through banking services and its products.

According to the report of RBI, the banks’ operating expenses have increased by Rs. 5.9 lakh crore in the fiscal year 2024 which is 20 percent more compared to the previous year. Also strengthening of regulatory compliance will lead to increase in cost of non-compliance. This will lead to an increase in reputational and business loss more than the past.

Apart from this, banks have to focus on their lending channels. In sectors, it faces a slow down. While in some industries such as chemical and chemical products, infrastructure, petroleum, coal products and nuclear fuels faced increased growth. Overall increase in loans to industry rose by 8.1 percent Y-o-Y in November 2024 compared to the previous year of growth of only 5.5 percent. Also, the retail sector recorded growth of 16.3 percent compared to 18.7 percent in the previous year due to a decline in growth in unsecured loans, vehicle loans and credit card outstanding. According to the RBI, housing loans, which has the largest share in retail lending, observed accelerated growth. Indicating that technology alone cannot resolve all the concerns of the banks.

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Business, Markets, Result Updates - July 27, 2022

Axis Bank’s net profit was up by 91% in Q1 FY23.

Axis Bank’s net profit was up by 91% in Q1 FY23.

Axis Bank reported a net profit of Rs. 4,125 Cr. in the June 2022 quarter, a jump of 91% from the June 2021 quarter at Rs. 2160 Cr. The advances stood at Rs. 7.01 lakh crore, up by 17% from June 2021. However, the advances were down by about 7.07 lakh crores from March 2022.

In Q1 FY23, NII increased by 20.9% year on year to Rs. 938 Cr. NIM stood at 3.6%, improved by 11 bps QoQ and by 14 bps YOY. The PPOP was at Rs. 588 Cr., with a decline of 8.2% YOY. The fee income was at Rs. 357 Cr. in June 2022, up by 34% YOY. The provisions for the quarter stood at Rs. 359 Cr. The street is disappointed with the loan growth for the June 2022 quarter, down by 7.5% QOQ and 43.5% YOY at Rs. 368 Cr. The gross slippage ratio was at 2.05%, declining by 20 bps YOY and 33 bps QOQ. 45% of the gross slippages were contributed by borrowers’ linked accounts, which were standard. The GNPA and NNPA ratios improved and stood at 2.7% and 0.64%, respectively.

The PCR ratio was at 77% for the quarter. We believe that the asset quality will be constant and improve in the near future. The cost to income ratio stood at 52.5% for the June 2022 quarter at Rs. 357 Cr. and we expect the ratio to increase due to investments in technology. While income growth is expected to improve, The bank is focused on the three core areas: deepening performance culture, strengthening the core and building for the future. It continues to invest in the SME space, extending its distribution and service across India. On Citibank customer business integration, Axis Bank is waiting for CCI approvals and expects to close transactions. 69% of the bank’s loan book is floating rates, which will rise in the policy tightening environment.

The stock price closed at Rs.719.05 and touched an intraday high of Rs.707 and a low of Rs.703. The market capitalization for the bank is Rs. 2.21 lakh cr. The 52-week high was at Rs. 866 and the 52-week low was at Rs. 618.25.

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