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Credit Growth

LTFH Q3FY25: Retail Growth Shines Despite Profit Hit from Higher Provisions
Business, Equities, Markets - January 20, 2025

Hike in costs of funding possibly affect margins of NBFCs

Hike in costs of funding possibly affect margins of NBFCs

The Non-Banking Financial Companies (NBFCs) in India are expected to face burdens in their profit margins in the third quarter of December, 2024. The reasons for this is due to increasing liquidity issues and also a spike in cost of funds. Apart from this, both the NBFCs and microfinance firms have a large portion of unsecured loans. Due to a significant portion of unsecured loans, both of them are expected to face issues of late loan repayments.

NBFCs margins
The Elara Securities’ analyst, Shweta Daptardar states that the NBFCs are expected to record a fall of 13 basis points on a year-on-year basis in net interest margins (NIMs). Here, a single basis is about 0.01 in percentage point.

In the situation of increasing cost of funds, NBFCs are focusing more on diversification of liability. It will help the companies to spread out their financial risks. The third quarter of the current financial year is anticipated to observe the increasing burden on NIM and also high cost of managing loans.

The firms are trying to maintain their profitability through making provisions for potential losses due to delayed or non-payment of interest and principal amount. They are also focusing on enhancing operational efficiency of the company. Despite this, NBFCs are projected to record a fall in return on assets in the third quarter.

Further the brokerage firm Elara projected the growth of advances to fall to less than 18 percent on a year-on-year basis compared to the growth of 20 percent in the previous financial year. Elara also states that this weakening growth can possibly be observed in the NBFCs until the completion of the current financial year 2025. The reason for this is due to issues such as balance sheet risks, funding issues, and challenges occurring during changing business models.

Asset quality of NBFCs
Abhijit Tibrewal, an analyst of Motilal Oswal stated that the improvement of NBFCs’ loan quality projected in the second half of the current financial year will not be seen in the third quarter of the current financial year. As there was no big distress of decline, the quality of loans (assets) will either stabilize or fall slightly.

For microfinance firms, the cost of loans is anticipated to persist high and are further projected to rise high. The exception to high loan costs is only power and affordable housing finance companies. The loan cost is projected to rise high for vehicle financing firms and other diversified financing firms as well. The only exception in vehicle financing firms is Mahindra and Mahindra Finance.

Further the brokerage firm states that the net profit growth of its firms under coverage universe to be around 8 percent on a year-on-year basis. This growth is affected by factors such as persistent higher cost of loans, burden of weak NIM, and also pressures faced by microfinance firms in this third quarter again.

Many large NBFCs will start to announce their results from 20th January, 2024 onwards. L&T Finance is the first NBFC to announce its result.

Bunty Chawla, an analyst of IDBI Capital states that the expansion of credit book growth is expected to slow in the third quarter. The reason for this is weakening growth in auto financing. He further states that contraction in loan quality of both housing finance firms and NBFCs. The risk of stage 3 Assets ( loans repayment overdue more than 90 days) for housing finance and NBFCs is projected to be increasing by every quarter. It is because of lack of collection of loan payments and also adverse impact of unpredictable rainfall.

The retail NBFCs are anticipated to be affected by increased regulations, regional issues and also excessive structural leveraging. The major burden of NBFCs is located in retail credit which amounts to 35 percent of the total NBFC loans. In contrast to this, the micro finance only contributes to about 3.4 percent total credit and 9.6 percent of total retail advances. This situation is quite a matter of issue.

The third quarter is not only a quarter of worry due to high asset cost, the fourth quarter of this financial year is also expected to face issues. NBFCs’ non-performing assets in the third quarter is projected to surge by 6 basis points and hike in loan costs by 56 basis points on a year-on-year basis. The reason for this is ongoing difficulties in the industry. It is also due to the cautious approach taken by companies towards provisioning for potential losses. The reason for keeping more funds for potential losses is due to stricter rules of supervision.

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Microfinance sector recorded surge in NPAs to Rs. 50000 crore
Banking, Business, Equities, Markets - January 16, 2025

SFBs to face high NPAs and slow credit growth in the financial year 2025

SFBs to face high NPAs and slow credit growth in the financial year 2025

The Small Finance Banks (SFBs) in India are expected to see an increase in Non-performing Assets in the financial year 2025, as per the information given by ICRA, a credit rating agency. The rating agency further stated that the asset (credit) growth will observe a weak growth. This weakening growth is expected to be around 18 to 20 percent compared to the 24 percent growth in the financial year 2025. Previously, it has experienced a thriving growth in the last two financial years.

Increase in Gross NPAs ratio
The Small finance banks’ gross non-performing assets ratio surged to 2.8 in the month of September compared to the previous ratio of 0.5 percent. The reason for this increasing indebtedness is problems in the microfinance sector. It has affected the asset quality of the SFBs badly. ICRA underlines that these SFBs will face issues while maintaining their asset (loan) quality.

The microfinance sector in India is facing a number of challenges such as increase in overdue loans, operational challenges, and regulatory issues. Most of the small finance banks are active in the microfinance segment only. The growing concerns in the microfinance segment is also considered as the reason for the slow growth in credit creation in the small finance banks.

Diversification of asset class
For many years, the small finance banks segment has been working on diversifying their various services offerings. Currently, these products consist of many retail asset (loan) types such as business loans, gold loans, and loans against property. housing loans, and auto loans. This increase in the secured asset class has led to a fall in share of unsecured loans in the total asset class of these banks.

ICRA’s head for the financial sector rating, Manushree Saggar stated that the matter of concern in the microfinance industry indicates that the possible growth drivers in the financial year 2026 will be secured asset classes as many SFBs are moving towards diversification of portfolios. The SFBs are taking measures towards reducing their dependency on unsecured asset classes.

Issues with CASA
A significant proportion of current and savings account deposits (CASA) in banks is important in terms of banks’ financial health as well as its ability to generate credit availability. Currently, the share of CASA of the small finance banks recorded 28 percent of growth by the month of September, 2024. Despite this, the growth in CASAs of SFBs is considerably smaller compared to the CASA proportion of universal banks.

The small finance banks in India face the issue of increasing the share of low-cost CASA. In the month of September 2024, the credit-deposit ratio of SFBs fell to around 89 percent compared to the credit-deposit ratio of 97 percent in the month of March 2023. This challenge is expected to carry on in the upcoming term as well.

The rating agency also anticipates that the small finance banks will face the issue of increasing competition in deposit levels. This will lead to a shift of small finance banks in the direction of term deposits, which have high interest rates. This shift will lead to a hike in funding expenses.

Other issues of SFBs
The small finance banks are suffering from the issue of rising operating expenses. The reasons for higher operational cost is expansion of branches, increase in staff costs, and also the increasing measures taken for tackling the NPA debtors. These issues are largely leading to hikes in operations expenses of these banks.

Adverse impact on Profitability
The hike in asset cost is anticipated to slow down the total profitability ratio of the small finance banks in the financial year 2025. At the industry level, the ratio of return on assets is expected to fall at a range of 1.4 percent to 1.6 percent in the financial year 2025 compared to the return on asset ratio of 2.1 percent in the financial year 2024. Overall, these challenges will impact the margins of small finance banks adversely.

The future prospects for the small finance banks highlights an adjustment period. It has to go through these challenges of credit creation, high NPA, and operational costs. At the same time, the SFBs has to find better growth opportunities through the process of increasing the proportion of secured assets and also diversification of its portfolio.

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India plans to divestment of 5 public sector banks

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Business, Equities, Market News, Markets - January 9, 2025

Bank Q3 Results reflect slower credit growth

Bank Q3 Results reflect slower credit growth

Overview
In the Indian banking space, both private and public sector banks have seen a sharp decline in credit growth in the past few months and this reduction is likely to get spilled in the financial year of 2025-26 as well. This slowdown trend is evident in the credit growth update from the Q3 results of most banks showcasing the same. Although banks have reflected increments in advances and deposits, the credit expansion and disbursement rate has taken a hit compared to previous growth rates over the past few quarters. There are many reasons for this credit growth rate erosion but the factor that stands out is RBI’s excessive crackdown on lending on unsecured loans. This is when RBI expressed a concern on bad loans thus increasing the capital requirement for personal loans and credit card loans. This has also prompted banks to improve their already high credit-to-deposit (CD) ratios. ICRA predicts that loan growth will fall to 9.7% -10.3% in the fiscal year ending March 2026. This reduction would be the result of banks lowering CD ratios and changing the implementation of adjustments in the liquidity coverage ratio framework, which would take effect in the next fiscal year.

Quarter 3 Results
Coming to the Q3 results for banks, earnings in the third quarter of FY25 will be modest, owing to weaker business growth, static margins, and asset quality stress. According to Nuvama Research, the third quarter of FY25 was difficult due to rising credit costs, slowing loan growth, a deposit shortage despite slowing loan growth, mild pressure on net interest margin (NIM), and decreased trading gains. Speaking of asset quality, micro-finance loans including unsecured loans continue to put pressure on banks’ balance sheets. While banks like HDFC, ICICI, and some state banks are less vulnerable to this factor but micro-finance Institutions (MFIs) lenders are set to see a sharp deterioration. Banks that have quite the exposure for these unsecured loans include Bandhan Bank, IndusInd Bank, and RBL Bank. IndusInd Bank reported a 0.75 percent dip in deposits and a 2.8% increase in advances, whereas YES Bank’s deposit growth was nearly unchanged sequentially and advances increased by 4.22%. Meanwhile, RBL Bank’s deposits fell by 1.11 percent, compared to a 3.3% fall, while Bandhan Bank’s deposits increased by 2.02%, despite a 1.06% loss in loans.

According to brokerage Motilal Oswal, systemic credit growth has fallen to 11.5% from a previous high of 16%, owing to a slowdown in unsecured retail and demand deceleration in certain other secured areas. While a few banks, like as IndusInd Bank and RBL Bank, have already reduced their growth forecasts, select large banks are also expected to publish sluggish full-year growth forecasts due to a high credit-deposit (CD) ratio and mounting asset quality worries. In Q3, HDFC Bank’s advances increased by 3% year on year to ₹25.42 lakh crore, while deposits increased by 16% to ₹25.63 lakh crore. According to preliminary data supplied by banks, only IDBI Bank and IndusInd Bank showed loan growth outpacing deposit growth during the quarter.

HDFC Case
Analysing HDFC Bank’s case, the gap between credit and deposits was glaring. Deposits increased five times faster than loans, by 15% year on year, compared to 3% loan growth in the third quarter. More importantly, the December quarter marked the first time since the bank acquired its parent in July 2023 that the bank’s aggregate deposits exceeded its total loan book.
Total deposits climbed by 15% year-on-year to Rs 25.63 lakh crore, with loan book at Rs 25.42 lakh crore. To put it in perspective, in the quarter ending December 2023, the gap between HDFC’s loans and deposits was a huge Rs 2.55 lakh crore, with deposits at Rs 22.14 lakh crore and loans at Rs 24.69 lakh crore. HDFC Bank sold Rs 21,600 crore of loans through securitization during the quarter, bringing the total amount sold to Rs 46,300 crore for the fiscal year, allowing the bank to reduce its C/D ratio from 110% in July 2023 to 87% in September. The lender’s deposit growth rate was 15.8% over the previous year and 2.5% quarterly.
Consequently, HDFC Bank Ltd. was the second largest contributor to the 350-point decline in the Nifty 50 index on Monday, January 6. The stock is adding approximately 40 points to the Nifty’s downward trend. The stock was the greatest contributor to the Nifty’s decline on Friday, with losses of more than 2.5%.

PSU Banks
Shares of state-owned banks fell on Monday (6th of January, 2025) after these banks reported modest deposit and credit growth data for the October-December quarter (Q3) of 2024-25 (FY25). The Nifty PSU Bank index fell 4%, with Union Bank of India emerging as the biggest loser, with its shares falling 7.5% to close at Rs 114.7, followed by a 5.7% drop in shares of Bank of Baroda (BoB) to Rs 228 and a 4.7% slide in shares of Bank of India to Rs 99.8 on the NSE. Meanwhile, the Pune-based Bank of Maharashtra reported a slight 1% increase in deposits, but advances increased by 5.13 percent sequentially. PNB’s deposits increased by 4.9% in the third quarter of FY25, while advances increased by 4.7%.

To summarise, according to central bank data, retail credit growth fell to 16.3% in the fortnight ending November 29, 2024, down from 18.7% in the same time in 2023, owing mostly to a drop in growth of personal loans and auto loans. Auto and personal loan growth has been cut in half, to 10% from 21% and 12% from 25% a year ago, according to central bank data. Credit card outstanding growth has also slowed to 18% in November 2024, down from 34% the previous year. Thus, to rescue this situation, RBI is expected to induce liquidity soon by way of further rate cuts which would allow the deposits and advances to grow in tandem with GDP of the nation.

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Credit Growth Expected to Slow as Provision Costs Rise
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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