Banking sector focus: Loan growth at 15% with private banks outpacing public banks, Kotak estimates weaker growth by FY24 end

The Indian banking sector has remained largely shielded from the recent turmoil in the US and European banking sectors and has even posted a strong performance. According to the takeaways from the Reserve Bank of India’s (RBI) release, loan growth is holding up at ~15 per cent, with private banks growing at a marginally faster pace than public banks. It said that the sector showed nearly similar performance across metro, urban, semi-urban and rural markets. It also stated that the household demand for loans is holding up at ~17 per cent yoy. The slowdown, RBI stated, is more pronounced to the government sector (10 per cent YoY) while the private corporate sector is recovering, but still not robust. The release said that the intent to lend appears to be still holding up as challenges on asset quality appear to still be comfortable. Kotak Institutional Equities estimates that the loan growth will be weaker towards the end of FY2024. 

The banking sector had a good run in the previous financial year with both public and private sector banks reporting net profits of more than Rs 1 trillion and this performance continued in the first quarter of FY24. Public sector banks’ profits more than doubled to Rs 34,774 crore during the first quarter. And, large private sector banks, such as HDFC, ICICI and Axis, posted strong double-digit growth in profits. Among public sector lenders, Bank of Maharashtra (BoM) emerged as the top performer in loan and deposit growth in percentage terms during Q1FY24. 

Further, per the RBI’s ‘sectoral deployment of bank credit – July 2023’. Credit growth to agriculture and allied activities improved to 16.8 per cent YoY in July 2023 from 13.2 per cent a year ago. Credit to industry registered a growth of 5.2 per cent on-year in July 2023 as compared with 10.5 per cent in July 2022. Among major industries, credit growth (on-year basis) to basic metal & metal products and textiles accelerated in July 2023 as compared with the corresponding month of the previous year. Credit growth to chemicals & chemical products, food processing and infrastructure decelerated/contracted. Credit growth to services sector accelerated to 19.4 per cent on-year in July 2023 from 16.7 per cent a year ago, primarily due to trade and commercial real estate. Personal loans, meanwhile, registered a growth of 18.4 per cent YoY in July 2023, supported by housing and vehicle loans.

Growth still broad-based

Kotak Institutional Equities said, “When we look at the various metrics—ticket size, type of loans (working capital or term loan), sectors, type of banks and state-wise distribution of growth—the underlying trends broadly suggest that the growth that we are seeing is much more broad-based.” It said that the difference in growth rates between large and small banks, public and private, banks and non-banks, do not appear to be too different and the intent of these lenders remain fairly positive to grow their loans robustly in FY2024. “MSME is an area of focus, largely led by an improvement in tools such as ability to monitor or origination. On the negative side, recent data on capexled demand growth remains weak,” it said.

The Kotak report further stated that the deposit mobilization has only marginally improved, but loan growth is still quite ahead of deposit growth, suggesting that private banks, whose CD ratios are still quite high, would need to have a more balanced approach while building their balance sheets.

“Although we are building in lower loan growth for the overall sector for FY2024, we are still comfortable to keep our credit costs closer to all-time lows. Net NPL ratios are closer to all-time lows and we shall change our views on credit costs if there is any unforeseen development or a regulatory change, especially from ECL provisions. Most early warning indicators that we are able to monitor or our discussion with companies do not suggest any stress in the portfolio currently,” it said.