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As On 05-Mar-2021 11:48
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  • Banks: Expects measure to boost credit growth with focus on achieving US$ 5 trillion economy

    The credit growth of scheduled commercial banks (SCBs) has improved to 7.6% YoY to Rs 10044845 crore as on 03 January 2020, compared with 7.1% growth a fortnight ago. However, the credit growth has decelerated from 14.8% at end January 2019.

    Non-food credit, accounting for 99.2% of the share of the total credit, recorded a growth of 7.5%, YoY, to Rs 9961343 crore as on 03 January 2020 as against a rise of 7.1% fortnight ago and 13.8% rise a year ago. Food credit moved up 15.4% to Rs 83502 crore as on 03 January 2020.

    Aggregate deposits growth of the scheduled banks increased 9.8% YoY at Rs 13210358 crore as on 03 January 2020, compared with 10.1% growth a fortnight ago and 9.6% rise a year ago. The time deposits showed an increase of 9.7% at Rs 11842466 crore, while the demand deposits moved up 10.9% to Rs 1367893 crore as on 03 January 2020.

    The overall credit-deposit ratio declined on sequential basis to 76.0% as on 03 January 2020 from 76.5% a fortnight ago and 78.0% in January 2019 with the faster growth in deposits.

    The banks investment in government and other approved securities that qualify for treatment of statutory liquidity ratio jumped 11.5% YoY to Rs 3771250 crore as on 03 January 2020, showing acceleration in growth from 10.9% increase a fortnight ago. The banks investment had declined 0.1% in January 2019. The investment-deposit ratio rose to 28.5% as on 03 January 2020, which is much higher above the Statutory Liquidity Ratio of 18.25%.

    The banking sector aggregate credit growth moderated to 8.7% on a y-o-y basis in September 2019 from 13.2% in March 2019, deposit growth improved to 10.2% from 9.9%. The banking sector's credit growth falling short of deposit growth was last seen during Q2 of 2016-17. Among bank groups, credit growth of public sector banks (PSBs) decelerated to 4.8% (y-o-y) in September 2019 from 9.6% in March 2019; private sector banks' (PVBs) credit growth moderated to 16.5% from 21%. There was, however, a sharp contrast between the wholesale and retail credit growth in PVBs - wholesale credit grew at 7.2% as against a retail credit growth of 27.2%. Deposit growth in both PSBs and PVBs exceeded their credit growth, although deposit growth in PSBs remained relatively sluggish at 6.6% y-o-y in September 2019 as against 19% for PVBs.

    Growth in net interest income (NII) slowed down to 13% in September 2019 as compared to 16.5% in March 2019, one possible reason being higher growth in deposits as compared to credit. However, due to higher growth in other operating income (OOI) (particularly driven by profits on securities trading in PSBs which increased about tenfold as compared to end-September 2018), SCBs were able to maintain better earnings before provisions and taxes (EBPT) growth. Given that PSBs' trading portfolio classified as held for trading (HFT) is miniscule, such an increase in profits on securities trading is possibly due to aggressive available for sale (AFS) positioning. However, the AFS portfolio being part of the structural balance sheet typically does not have safeguards like risk limits / stop loss limits which are typically available for pure trading portfolios. Aggressive interest rate positioning in the structural balance sheet based on anticipated softening of rates may have significant adverse consequences if the anticipated rate softening fails to materialise. With regards to buffers against anticipated risks, PVBs' provisions grew at a faster rate as compared to those of PSBs.

    PSBs' profitability ratios were muted because of weak credit growth as well as slow resolution of non-performing assets (NPAs). PVBs' profitability ratios also declined whereas foreign banks showed better profitability. PSBs' weak return on equity (RoE) and return on assets (RoA) numbers compared to their private sector counterparts continue to come in the way of their ability to raise equity capital from the market at a decent cost.

    Post the corporate tax rate cut in September 2019, a few banks decided to exercise the option of lower tax rate available under Section 115BAA of the Income Tax Act, 1961. Hence, profit after tax (PAT) across different banks is strictly not comparable for Q2 of 2019-20 and H1 of 2019-20 financial results. Concurrently, certain banks have re-measured their accumulated deferred tax assets as on 31 March 2019 based on the lower rate prescribed and the resultant impact has been taken through the profit and loss account (P&L). Comparing the performance in H1 of 2019-20 across various categories of SCBs using Profit Before Tax (PBT) shows that RoA for PVBs has improved from 1.7% (1.2% based on PAT) as at end-September 2018 to 1.8% (1.0% based on PAT) as at end- September 2019 as opposed to a decrease in RoA based on PAT. For PSBs, RoA based on PBT improved from -1.0% (-0.7% based on PAT) as at end-September 2018 to 0% (-0.1% based on PAT) as at end-September 2019. On an aggregate basis RoA of SCBs based on PBT moved from 0% (-0.004% based on PAT) as at end-September 2018 to 0.7% (0.4% based on PAT) as at end-September 2019. Hence, the improvement in SCBs' profitability has been more robust than what has been indicated based on PAT figures for Q2 of 2019-20 after isolating for the one-off charges and the reduced taxation related impact.

    The banking sector GNPA ratio remained unchanged at 9.3% between March 2019 and September 2019, though the level of GNPAs increased marginally by 0.2% during the same period. However, SCBs' net non-performing assets (NNPA) ratio declined in September 2019 reflecting increased provisioning. The aggregate provision coverage ratio (PCR) of all SCBs increased to 61.5% in September 2019 from 60.5% in March 2019. PCRs of both PSBs and PVBs increased in September 2019.

    Following the recapitalisation of PSBs by the government, SCBs' capital to risk-weighted assets ratio (CRAR) improved to 15.1% in September 2019 from 14.3% in March 2019. PSBs' CRAR improved to 13.5% from 12.2% during the same period. There was a marginal increase in PVBs' CRAR. SCBs' Tier-I leverage ratio increased from 6.3% in March 2019 to 7.4% in September 2019.

    Bank-wise distribution of asset quality showed that while 24 banks had GNPA ratios under 5%, 4 banks had GNPA ratios higher than 20% in September 2019. Bank-wise distribution of capital adequacy showed that the number of banks with a CRAR of more than 12% increased in September 2019. For banks with high GNPA ratios, availability of growth capital (Tier-I capital) appears to be limited.

    The asset quality of agriculture and services sectors, as measured by their GNPA ratios, deteriorated in September 2019 as compared to March 2019. For the industry sector, though, slippages during the period declined. Among the sub-sectors within industry, the slippage ratios of ‘textiles', ‘rubber' and ‘construction' industries increased during the period.

    The share of large borrowers in SCBs' total loan portfolios and their share in GNPAs was at 51.8% and 79.3%, respectively, in September 2019; these were lower compared to the 53% and 82.2%, respectively in March 2019. In the large borrower accounts, the proportion of funded amounts outstanding with any signs of stress (including SMA - 0, 1, 2, restructured loans and NPAs) increased from 20.9% in March 2019 to 21.2% in September 2019. SMA-2 loans increased by about 143% between March 2019 and September 2019. The top 100 large borrowers accounted for 16.4% of SCBs' gross advances and 16.3% of GNPAs.

    Sector expectations

    Banking Recapitalization: The government has provided strong capital support for public sector banks, while there are expectations of another round of capital infusion into public sector banks. The enhanced capital allocation for public sector banks would be positive for them.

    Consolidation of public sector banks: The government announced the mega merger of public sector banks moving ahead on the path of consolidation and reforms in the PSBs, while reducing the number of PSBs to 12 banks from 27 banks in 2017. The budget may provide more information on progress of consolidation of public sector banks.

    Incentives for digital transactions: The government has continued to provide significant support for digital transactions, while further supports are expected in budget. This would promote the use of technology, while providing operating leverage to the banks. Greater incentives for digital payment would be positive for the finance sector as it would boost efficiencies in cost structures.

    Incentivizing Savings through Bank channel: In an effort to incentivize savings though banking channels, there is a long standing demand to reduce the lock in period for Tax savings Term Deposits need to be reduced to 3 years from the present 5 years.

    Higher fiscal deficit: The fiscal deficit slippage may cause spike in bond yields leading to increase in borrowing costs. This would also lead banks to incur mark-to-market losses on investment book.

    Key stocks to watch

    State Bank of India, Bank of Baroda, Punjab National Bank, ICICI Bank, Axis Bank, Federal Bank


    The banking sector has moderated sharply to 7.1% in December 2019. The moderate loan growth and still large stock of stressed assets is major concern for the banking sector. Bank margins in future would be driven by transition to external-linked benchmarks, resolution of large NPAs, falling interest rates etc. However, the strong recovery from few large corporate accounts is likely benefit corporate banks on asset quality front in Q3 of FY2020. The decline in deposit rates and cost of funds is positive for banks margins. The banking sector would await measures in the budget to revive credit cycle and capitalization and digitalization.

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Flash News 05-Mar-2021
  •  ( 11:34) PVR launches 6-screen property in Forum Centre City Mall, Mysuru  
  •  ( 11:28) Equity indices trade sideways with losses  
  •  ( 10:49) PNB Housing Finance, Yes Bank join hands to offer customized retail loans  
  •  ( 09:52) Dilip Buildcon receives LoA for two Karnataka-based projects  
  •  ( 09:45) BCPL Railway Infrastructure bags a LoA from Railway Vikas Nigam  
  •  ( 09:29) Positive market breadth  
  •  ( 09:25) Nifty drops below 15,000   
  •  ( 09:24) ISGEC Heavy Engg. secures a deal from Shree Cement to set up boilers  
  •  ( 09:22) Wipro acquires London-based Capco for $1.45 billion  
  •  ( 09:19) Market trading lower in early trade  
  •  ( 08:15) OPEC+ extends most oil output cuts into April  
  •  ( 08:09) US stocks drop on Thursday as Powell fails to ease rate fears  
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05 March 2021 11:46
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