It was a forgettable year for banks, as nothing in their performance, up until the September 2016 quarter, suggested that the worst was over for the beleaguered sector. On the contrary, the sector is now strewn with fresh set of challenges post demonetisation.
The full impact of this will only be visible in the December and March quarter performance. But that apart, the sector still has to grapple with persisting asset quality concerns.
Four quarters after the RBI’s asset quality review (in the December 2015 quarter), the September quarter numbers failed to indicate that the bad loan issue was bottoming out. While the quantum of slippages fell sharply from the second half of the 2016 fiscal to the first half of this fiscal, incremental provisioning on account of ageing NPAs, continued to depress earnings. Between March and September 2016, gross NPAs for PSBs, went up from 9.8 per cent to 11.8 per cent.
There were a few large private banks such as ICICI Bank and Axis Bank too, that were weighed down by the sharp rise in bad loans. GNPAs for private banks went up from 2.8 per cent as of March 2016 to 3.2 per cent in the first half of this fiscal.
Asset quality concerns aside, weak core earnings owing to tepid loan growth is a cause for worry. As of the September quarter, loan growth was a muted 10 per cent.
The trend was widely disparate for PSU banks and private banks. As of September 2016, loan growth for PSBs was a meagre 2.7 per cent. Private banks, on the other hand, continued to show resilience and grew their loan book by around 25 per cent. The latest figures put out by the RBI paint a more dismal picture for the overall banking system.
As of December 23, loan growth has slipped to just 5 per cent. This will impact earnings for banks in the second-half of this fiscal. Banks had to transition to the new marginal-based lending rate norms in 2016, which has led to steep cuts in lending rates, adding pressure on margins.
While private banks have managed to deliver stable margins due to growth in high yielding loans, weak loan growth has posed greater challenge for PSBs. Net interest income for private banks has grown by 14 per cent year-on-year in the September quarter, for PSBs it shrunk by 3 per cent.
On the net profit level, while PSU banks saw earnings fall by over 60 per cent, private banks toob saw a marginal decline of 5 per cent.
The only trigger for loan growth, besides consumption driving retail loan growth, will be government spending in FY18. That said, a pro-growth Budget, stimulating investments in infrastructure, can benefit the banking sector.