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Last Updated : Nov 13, 2019 08:03 PM IST | Source: Moneycontrol.com

Loan growth drops to demonetisation lows; India's financial sector battles pressure

NBFCs saw a 36 percent year-on-year fall in disbursements, while the bank lending fell to 8 percent, a Credit Suisse report says.

India's financial sector continued to be troubled in the second quarter that saw loan growth drop to demonetisation lows of 6 percent, global brokerage firm Credit Suisse has said in a report.

Non-banking financial companies (NBFCs) saw a 36 percent year-on-year (YoY) fall in disbursements in the September quarter of the financial year 2020, while the bank lending fell to 8 percent, Credit Suisse said.

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The report shows that the fall in bank credit was driven by both public and private sector banks.

"Even private banks’ loan growth has dropped to 14 percent from 22 percent a year ago. PSU loan growth is down to 5 percent YoY from 8 percent in Q1 despite the large recapitalisation," said Credit Suisse.

Growth for NBFCs and housing finance companies (HFCs) also slowed to 7 percent from 24 percent a year ago. With this, the cumulative loan growth has fallen to 6 percent YoY from more than 10 percent in Q4FY19 and 11 percent in Q2FY19.

Chart 1

While loan growth slowed, private banks’ operating performance remained stable, with healthy net interest income (NII) growth at 18 percent YoY and 16 percent growth in pre-provision profits, said Credit Suisse.

With the pick-up in treasury income, profit before tax (PBT) growth was strong at 34 percent YoY, but profit after tax (PAT) was down 3 percent on deferred tax asset (DTA) impact on account of the tax rate cut.

Besides, the second quarter saw an improvement in margins for both PSU and private banks, with PSUs doing better on the back of lower slippages and declining cost of funds.

As the loan-to-deposit ratio (LDR) get better, net interest margins (NIMs) should improve further. “However, with RBI's focus on transmission, we may see the pace of lending rate cuts increase. The impact of floating rate retail loans shifting to externally benchmarked rate could have some impact in the near-term," Credit Suisse said.

Chart 2

Despite an improvement in NIMs, with loan growth muted, pre-provision profits remained weak, with PPoP-to-assets for most PSUs remaining low at 1-1.7 percent, Credit Suisse said.

NBFCs are still facing tight funding. Over the past year, mutual funds have cut NBFC exposure by 30 percent and several of them are unable to raise long-term money as differentiation continues.

Overall bond issuances to the NBFC sector remains tepid, and aggregate issuances are down 40 percent YoY.

Access to shorter-term money has also been limited for some NBFCs. The Credit Suisse report showed that the aggregate commercial paper (CP) outstanding was down 17 percent YoY in September. Moreover, the CP market continues to differentiate across NBFCs.

On the other hand, bank lending to NBFCs continues to grow, up about 30 percent YoY in September, now accounting for 8.5 percent of banking sector loans.

"Bank exposure to NBFCs has continued to increase and is at 10-16 percent of most of the PSU Banks, growing 15-30 percent YoY, with the low-LDR banks seeing stronger growth," Credit Suisse said.

Given the tightness in liquidity, NBFCs have been selling down loans to meet funding needs and there are now divergent trends emerging amongst NBFCs.

"While the pace of selldown has been rising for most NBFCs, with 25 percent of AUM already sold down by Indiabulls Housing Finance, the stock of ‘off-book AUM’ has declined over the past two quarters, indicating limitations to further selldown," Credit Suisse pointed said.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.

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First Published on Nov 13, 2019 11:49 am
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