Over the weekend, all eyes were on the ICICI Bank, as the lender announced a good set of numbers on Saturday. The key numbers—both on growth and asset quality—throw up good news for the bank and map the road ahead for the industry. Typically, big bank earnings are good indicators of the banking system health and business momentum.
The lender’s loan book grew around 19 percent on a year-on-year basis, while deposits grew by 11 percent. The net interest margin, the spread between interest earned and interest expended, jumped sharply to 4.90 percent in Q4 of FY2023 as against 4 percent same period last year. These numbers add to the industry’s optimism of a sharp turnaround.
To be sure, one needs to wait for other large banks to confirm a pattern but if ICICI Bank numbers are any indication, the Indian banking industry is looking at a bull run ahead. On the asset quality front, most of the large-ticket NPA cases are either pushed to the bankruptcy court or written off.
According to the Reserve Bank of India (RBI) data, the gross non-performing assets (GNPAs) of scheduled commercial banks (SCBs) declined to 4.5 percent in December 2022 from 6.5 percent a year ago. According to RBI rules, a loan is classified as NPA if there is no repayment of principal or interest for a period of 90 days. Banks have to set aside money, called provisions, against such loans. This impacts their profitability.
Loan demand too is picking up and large banks are looking at quality projects to fund on the wholesale side while the broader thrust seems to be on the retail book. In case of ICICI Bank, the lender’s retail loan portfolio grew 22.7 percent on-year and comprised 54.7 percent of the total loan portfolio at March 31, 2023. Its business banking portfolio grew 34.9 percent YoY on March 31, 2023, while small medium enterprises (SME) business grew by 19.2 percent YoY. ICICI Bank's rural portfolio widened 13.8 percent on-year and 5.5 percent on-quarter at March 31, 2023. The credit growth, across the industry shows signs of revival after the pandemic phase.
RBI clarification for HDFC Bank
The second major event for the banking sector was a clarification for the HDFC-HDFC Bank merger following certain requests made by the lender ahead of the merger. Among the issues the regulator has clarified, the two key ones-- related to priority sector lending obligations (PSL) and treatment of investments in subsidiaries—are important. The RBI has permitted HDFC Bank to spread the additional PSL over three years.
PSL refers to mandatory lending by banks to economically weaker sections of the society. Banks have to lend at least 40 percent of their money to such segments, of which 18 percent must be to agriculture. Given the size of the merged entity, this would have been a tremendous burden for HDFC Bank in the initial years of transition. Failure to meet PSL will require banks to invest in RIDF (Rural Infrastructure Development Fund) of Nabard. The staggered implementation of PSL will lessen the burden on the bank and impact on margins.
Also, permission to increase stake in HDFC Life and HDFC Ergo will help the bank mitigate the valuation concerns of subsidiaries. In the approaching days, we will see more banks announcing their quarterly earnings which should give further clarity on the business momentum.
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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