The Scheduled commercial banks (SCBs) credit growth has improved on sequential basis to 16.5% YoY to Rs 13281377 crore as on 13 January 2023, compared with 14.9% growth a fortnight ago. The credit growth has surged from 7.1% at end January 2022. Non-food credit, accounting for 99.6% of the share of the total credit, recorded a growth of 16.9%, YoY, at Rs 13228723 crore as on 13 January 2023 as against a rise of 15.3% fortnight ago and 7.3% rise a year ago. Food credit dipped 38.5% to Rs 52654 crore as on 13 January 2023. The overall credit-deposit ratio rose on sequential basis to 75.1% as on 13 January 2023 from 75.0% a fortnight ago, while moved up from 71.5% in January 2022 with the faster growth in loan book. As per the data on sectoral deployment of bank credit as released by the Reserve Bank of India (RBI), non-food bank credit increased 16.4% in November 2022 over a year ago, showing acceleration in growth compared with 7.1% increase in November 2021.

The credit to agriculture increased at improved pace of 18.7% in November 2022, showing acceleration from 10.4% growth in November 2021. Meanwhile, the credit growth to the industry rose 15.0% in November 2022 compared with 3.8% decline in November 2021. Within the industrial segment, the advances to large industry rose 10.7%, while credit to medium industry moved up 22.3% in November 2022. The credit for the micro and small industry increased 35.4% compared with 12.7% growth in November 2021.

Credit growth to the services sector has accelerated to 26.2% in November 2022 compared with an increase of 3.6% in November 2021, driven by acceleration in credit growth for Non-Banking Financial Companies (NBFCs) of which, at 32.4%, other services 26.1% and retail trade 33.3%, while credit growth has also improved for commercial real estate to 16.9%, professional services 22.6% and transport operators 21.7%. Further, the services credit for tourism, hotels and restaurants also accelerated to 29.5%, wholesale trade (other than food procurement) 16.5% and computer software 13.3%. However, the services credit for shipping declined 3.5% and aviation 8.7% in November 2022.

Personal loans increased at improved pace of 27.3% in November 2022 as against an increase of 11.6% in November 2021. Among the major segments of personal loans, the credit for Housing (Including Priority Sector Housing) increased at improved pace of 23.7%, Vehicle Loans 70.1%, Credit Card Outstanding 42.0%, Education 43.5%, Advances against Fixed Deposits (Including FCNR (B), NRNR Deposits etc.) 48.4%, Consumer Durables 189.6%, and Advances to Individuals against share, bonds, etc. 43.4%. However, the credit growth has moderated for Other Personal Loans to 12.9% in November 2022 from November 2021.

Priority sector loans growth improved to 38.5% in November 2022 compared with a 5.3% growth in November 2021. Among priority sector loans, the credit growth for micro & small enterprises improved to 32.5% and weaker sections 57.8%, while credit to housing also accelerated to 37.9% and agriculture & allied activities 27.2%.

Credit to the industrial sector accounting for 25.4% of the total banking sector credit increased 13.1% in November 2022 compared with a rise of 3.4% in November 2021. As per industry-wise classification, the credit growth in the gems & jewellery segment was negative at (-) 1.2% in November 2022.

However, the credit growth has accelerated for basic metal & metal product (15.3% from -15.5%), infrastructure (10.5% from 6.1%), petroleum, coal & nuclear fuels (65.0% from 24.6%), other industries (25.2% from 10.9%), chemicals & chemical products (19.1% from 6.4%) and cement & cement products (10.2% from -23.4%).

Further, the credit growth has moved up for construction (2.1% from -8.2%), all engineering (11.1% from 5.2%), vehicles, parts & transport equip. (8.3% from -2.0%), beverage & tobacco (24.4% from 2.0%), food processing (7.4% from 6.1%), glass & glassware (11.0% from -13.2%), wood & wood products (15.9% from 6.6%) and leather & leather products (5.9% from -1.7%).

On the other hand, the credit growth has decelerated for textiles (3.0% from 8.6%), mining & quarrying (incl. coal) (6.3% from 13.8%), rubber, plastic & their products (18.4% from 23.3%) and paper & paper products (6.6% from 8.4%) end November 2022 over November 2021.

Aggregate deposits growth of the scheduled banks increased 10.6% YoY at Rs 17674372 crore as on 13 January 2023, compared with 9.2% growth a fortnight ago and 8.3% rise a year ago. The time deposits showed an increase of 10.2% at Rs 15599153 crore, while the demand deposits increased 13.5% to Rs 2075219 crore as on 13 January 2023.

The banks investment in government and other approved securities that qualify for treatment of statutory liquidity ratio jumped 12.4% YoY to Rs 5199618 crore as on 13 January 2023, showing acceleration in growth from 10.6% increase a fortnight ago. The banks investment had moved up 3.3% in January 2022. The investment-deposit ratio rose to 29.4% as on 13 January 2023, which is much higher above the Statutory Liquidity Ratio of 18.0%.

As per the latest Financial Stability Report (FSR) of the RBI, The global economy is facing formidable headwinds with recessionary risks looming large. The interplay of multiple shocks has resulted in tightened financial conditions and heightened volatility in financial markets. The Indian economy is confronting strong global headwinds. Yet, sound macroeconomic fundamentals and healthy financial and non-financial sector balance sheets are providing strength and resilience and engendering financial system stability.

Buoyant demand for bank credit and early signs of a revival in investment cycle are benefiting from improved asset quality, return to profitability and strong capital and liquidity buffers of scheduled commercial banks (SCBs).

The gross non-performing asset (GNPA) ratio of scheduled commercial banks (SCBs) fell to a seven-year low of 5.0% and net non-performing assets (NNPA) have dropped to ten-year low of 1.3% in September 2022.

Macro stress tests for credit risk reveal that SCBs would be able to comply with the minimum capital requirements even under severe stress scenarios. The system-level capital to risk weighted assets ratio (CRAR) in September 2023, under baseline, medium and severe stress scenarios, is projected at 14.9%, 14.0% and 13.1%, respectively.

Stress tests for open-ended debt mutual funds showed no breach in limits pertaining to interest rate, credit and liquidity risks. Consolidated solvency ratio of both life and non-life insurance companies also remained above the prescribed minimum level.

The decrease in slippage, increase in write-offs and the continuous improvement in loan growth brought the GNPA ratio further down to 5.0% in September 2022. Under the assumption of no further regulatory reliefs as well as without taking the potential impact of stressed asset purchases by National Asset Reconstruction Company (NARCL) into account, stress tests indicate that the GNPA ratio of all SCBs may improve from 5.0% in September 2022 to 4.9% by September 2023, under the baseline scenario. If the macroeconomic environment worsens to a medium or severe stress scenario, the ratio may rise to 5.8% and 7.8%, respectively. At the bank group level, the GNPA ratios of PSBs may swell from 6.5% in September 2022 to 9.4% in September 2023, whereas it would go up from 3.3% to 5.8% for PVBs and from 2.5% to 4.1% for FBs, under the severe stress scenario.

Sector expectations

PSBs Recapitalisation: The banking sector does not have major expectation on infusion of any capital infusion from the government in Union Budget 2023-24. The public sector banks have started to raise capital on their own. The public sector bank has improved financial health on the back of reduction in bad loans. They may be encouraged to raise resources from the market and also by selling their non-core assets.

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 and a roadmap to reduce the government's stake in public-sector banks. This would help improve the efficiency of public sector banks.

Progress of Bad Bank: A key proposal announced in this year's (2021) Budget, a bad bank to deal with stressed assets in the loss-laden banking system, has received all regulatory approvals. The bad bank - National Asset Reconstruction Company has commenced operations. The further roadmap for the bad bank may be announced in the budget.

Extension of ECLGS Scheme: The ECLGS scheme providing government guaranteed loans to MSME sector is available up to March 2023. ECLGS scheme may be extended beyond March 2023 to boost economic growth and credit support especially to MSME and infrastructure segments. As per RBI data, Rs 2.8 lakh crore out of Rs 5 lakh crore sanctions had been disbursed under the scheme till September 2022.

Raodmap for digital currency: The government has continued to provide significant support for digital transactions, while further supports are expected in budget. RBI has launched pilots of Central Bank Digital Currency (CBDC) in wholesale and retail segments in 2022. Measures are likely to be announced to boost digital transactions through CBDC, which will impact banking and fintech sectors. With announcement of CBDC, more support for digitization and initiatives towards UPI expected.

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.

Fiscal consolidation: The fiscal deficit has increased in the recent year in the backdrop of pandemic. The focus would be on fiscal consolidation for 2023-24 and any fiscal 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. The government control on fiscal deficit would help to keep interest rate rise in check.

Gross borrowing programme: The central government could end up borrowing less than Rs 14.95 lakh crore announced in the budget, implying that net borrowing will also be less than Rs 11.19 lakh crore largely on account better than estimated revenue collections. The net borrowings are estimated at Rs 12-12.5 lakh crore and repayments at Rs 4.5 lakh crore leading to a gross borrowing of Rs 16.50-17.0 lakh crore

Key stocks to watch

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

Outlook

The banking industry is considered the backbone of any economy. It has faced a lot of problems during to the pandemic. However, the banking sector continued to report strong earnings performance supported by a sharp pick-up in loan growth to a decade high level, hefty margin expansion and dip in provisions. The banking sector has continued to exhibit substantial improvement in the asset quality. Fresh slippages of loans declined sharply, and the level of stressed asset has further moderated. Banks also continued to improve the provision coverage on bad loans, while the credit cost declined sharply to multi-quarter low. The earnings momentum is likely to remain strong with strong loan growth, low credit cost and high margins. The banking sector would watch for incentives for digitalization, progress of bad bank, roadmap on reduction of government stake in public sector banks and fiscal consolidation in the upcoming Union Budget 2023-24.