New Delhi: Public sector banks appear to be out of the woods as they managed to reduce their bad loans and post record profits this fiscal, a trend which is likely to continue in 2023 also. Robust credit demand and high interest rate regime due to tight monetary conditions globally are also expected to help the profitability of the banks.
RBI's decision to hike the benchmark lending rate, repo rate, since May this year will have a bearing on the profitability of the banking sector as margins would get a leg up in the absence of commensurate increase in deposit rates.
In the first half of current fiscal, 12 Public Sector Banks (PSBs), which account for around 60 percent market share in terms of total business, posted a 32 percent rise in cumulative net profit at Rs 40,991 crore. Out of the 12 PSBs, Punjab National Bank (PNB) and Bank of India reported a decline in profit ranging from nine to 63 percent over the second quarter of the previous fiscal.
In September quarter, PSBs reported 50 percent jump in their combined net profit at Rs 25,685 crore while their total profit surged 76.8 percent to more than Rs 15,307 crore in the June quarter.
Against the backdrop of the stellar performance of PSBs, Finance Minister Nirmala Sitharaman recently said that the government's efforts to reduce bad loans and further strengthen the financial health of the banks by infusing capital of about Rs three lakh crore in the last five years are showing results.
The robust performance of the banks in the first half of current fiscal has been ably supported by a well-capitalised banking system that witnessed an upswing in credit disbursement to the retail, industry and services segments.
The growth in credit to industries has been driven by an increase in bank credit to MSME mainly due to the Emergency Credit Line Guarantee Scheme (ECLGS).
Earlier this month, Sitharaman told Lok Sabha that Non-Performing Assets (NPAs) have come down drastically to 7.28 percent at the end of March 2022 due to various measures taken by the government. "NPAs declined as a result of the government's 4Rs strategy of recognition, resolution, recapitalisation and reforms," she had said.
The Asset Quality Review (AQR) initiated in 2015 led to a surge in stressed accounts. It reached a peak of 14.58 percent of total assets in 2018 and eased to 9.11 percent in 2021.
Loan growth stood at 17 percent while deposit growth was lower at 9.9 percent. In absolute terms, loan growth of banks in the past year was at Rs 19 lakh crore, and deposit accretion was Rs 17.4 lakh crore as of December 2.
Going by the current trend, banks, including PSBs, are going to post better numbers than the last financial year. In 2021-22, the aggregate profit of the 12 PSBs was at Rs 66,539 crore, up 110 percent from Rs 31,816 crore in the previous financial year.
As far as private sector banks are concerned, they earned a net profit of about Rs 91,000 crore, up 29 per cent over the previous year's (2020-21) Rs 70,435 crore.
While State Bank of India and leading private sector banks have largely addressed their asset quality challenges, many other large PSBs are still saddled with weak assets, high credit costs, and poor earnings, Deepali Seth-Chhabria, Associate Director of Financial Institutions Ratings at S&P Global Ratings, said.
The credit momentum has picked pace driven by an increased momentum in corporate borrowing, she said, adding, "we expect loan growth to stay in line with the nominal GDP growth. Deposits growth will lag leading to increased competition for deposits".
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