Is the worst over for India’s banks?

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India’s banks have been grappling with a sharp rise in bad loans in recent years. That has led to increasing provisions, which in turn hurt profitability. But, the worst may be over for the sector, with an analysis of the third quarter earnings suggesting that the non-performing assets are stabilising and credit growth to services and industry is improving, even as retail credit growth remains in double digits.

A study of 35 banks by credit ratings agency CARE Ratings shows that aggregate net profit in the quarter ended December 31 stood at Rs 392 crore, versus a Rs 4,905 crore loss a year ago. Net interest income was up 16 per cent year-on-year to Rs 94,976 crore, from Rs 81,867 crore.

Gross NPAs also grew at a slower pace of 8.4 per cent to Rs 902,853 crore in the October-December quarter, versus Rs 832,953 crore in the year ago quarter. Gross NPAs had risen 30.4 per cent from financial year 2017 to 2018 third quarter.

The gross NPA ratio fell slightly to 10.04 per cent end of December, versus 10.23 per cent in December 2017.

Darshini Kansara, deputy manager – industry research at CARE attributed the slower rise in NPAs to lower incremental NPAs being generated.

“The NPA situation in the Indian banking system has been stabilising as can be seen in the third quarter of FY19,” said Kansara.

However, it is still uncertain if all the legacy NPAs have been recognised by all banks; if the NPA growth continues to moderate for another quarter, it could signal that the recognition cycle was over, added Kansara.

Within the banking system, NPAs of public sector banks (PSBs) are still almost three times more than those of their private sector counterparts.

Gross NPAs of 18 PSBs stood at Rs 774,756 crore at the end of December; the gross NPA ratio rose to 13.09 per cent from 12.95 per cent. Gross NPAs of 17 private banks, in comparison, were at Rs 128,098 crore or 4.16 per cent in the third quarter.

During the period, retail loan growth was at 17 per cent, suggesting consumption demand remained strong, although it was lower than the 18.9 per cent growth reported in the year ago quarter. On the other hand, credit growth in the services sector rose sharply to 23.2 per cent from 14.7 per cent. Credit growth to industries doubled to 4.4 per cent, from a low base of 2.1 per cent. Credit growth in agriculture and allied activities declined to 8.4 per cent from 9.5 per cent.

“Growth in credit to industry and services has picked up during Q3 FY19 post the initial glitches faced by the implementation of Goods and Service Tax as well as various rate revisions that followed, which also reflects to an extent with improved industrial activity,” said Kansara.

The monetary policy committee of the Reserve Bank of India cut benchmark repo rate by 0.25 per cent earlier this month and with retail inflation remaining low, there is an expectation that there will be a further reduction in interest rates in the next MPC meet in April.

Acting Finance Minister Piyush Goyal had said that the RBI rate cut would boost the economy and lead to affordable credit to small businesses and home buyers.

Investment bank Morgan Stanley, too, is bullish on India’s banks.

“The NPL cycle is coming to an end. This will help drive up loan growth as corporate growth recovers and consumer loan growth stays strong,” it said recently.

Non-banking finance companies (NBFCs) had gained market share over the last few years as banks were weighed down by NPAs. However, in the backdrop of the crisis at infra lender IL&FS, these companies are facing difficulties. At the same time, fast paced technology adoption is expected to improve cost to income ratios for banks.

This could be a “great backdrop” for big banks in India, which are likely to gain market share “at an aggressive pace” as better yields drive up revenue growth, said Morgan Stanley.

It expects asset quality of corporate lenders to improve quickly and drive down credit costs from the next financial year.