Last week, Federal Bank and country’s largest private sector lender, HDFC Bank, announced quarterly earnings. Analysts find the key numbers as good particularly in terms of credit growth and improvement in asset quality. To get a perspective, let’s look at some key numbers.
HDFC Bank’s total advances as of September 30, 2022 were Rs 14.4 lakh crore, an increase of 23.4 percent over the previous year. Domestic retail loans grew by 21.4 percent, commercial and rural banking loans grew by 31.3 percent and corporate and other wholesale loans grew by 27 percent. Overseas advances constituted 3.1 percent of total advances.
In the case of Federal, total advances increased 19.4 percent to Rs 1.64 lakh crore as of September 30, 2022. The bank, in a conference call, called it the strongest quarter till date with very good growth across all key parameters. In terms of asset quality too, the improvement was visible. For HDFC Bank, gross non-performing assets (NPAs) were at 1.23 percent of gross advances as on September 30, 2022, as against 1.35 percent as on September 30, 2021.
Net non-performing assets were at 0.33 percent of net advances as on September 30, 2022. Federal Bank’s gross NPAs at 2.46 percent came lower than the 2.69 percent in the previous quarter. These numbers, if they offer any indication, signal good news for the overall banking sector health in the July-September quarter. But, it is too early to call it as other big bank results are lined up in the approaching days.
What are the challenges ahead?
The risks emanating from a prolonged delay in economic recovery and fast rising interest rates are clearly staring at the sector. The repo rate, the key lending rate of the central bank at which short-term funds are offered to banks, has gone up by nearly two percentage point in the current rate hike cycle.
Jayanth Varma, one of the six MPC members, highlighted in the MPC minutes released last week that it is dangerous to push the policy rate well above the neutral rate in an environment where the growth outlook is very fragile. “While the level of economic output has recovered to pre-pandemic levels, it remains well below the pre-pandemic trend line," said Varma who voted in favour of a 50 bps policy rate hike but voted against the majority resolution of further withdrawal of accommodation.
How does rising interest rates impact banks' business?
The higher cost will have to be reflected in lending and deposit rates. Credit growth may slow in the approaching quarters with costlier loans. Also, cost of funds may come under pressure with deposit rates going up further. Also, as exemptions and relaxations given to banks during Covid expire and normal repayments begin, banks may see pressure on asset quality especially on loans given to small and medium sized companies.
A lot will depend on how the growth-inflation scenario evolves.
(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)
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