IANS | 01 Jan, 2024
The 2024 outlook for the Indian banking sector is robust and healthy
with the Reserve Bank of India (RBI) hitting the pause button on the
policy rate revision, satisfactory capital levels, loan loss provisions,
and softening retail inflation, Sujan Hajra, Chief Economist and
Executive Director, Anand Rathi Shares and Stock Brokers has said.
Speaking to IANS, Hajra also anticipates a moderate acceleration
of deposit growth and a deceleration of credit growth in 2024 relative
to 2023, which will result in a system-wide reduction in the credit
deposit ratio. The sector will also experience a moderate decline in the
net interest margin next year.
He speaks about the likely
head/tail winds, merger possibilities, trends and other aspects that the
Indian banking industry might face in 2024.
Here are the excerpts from the interview.
IANS: What is the trend the Indian banking sector likely to see in 2024?
In light of the RBI’s pause of monetary tightening, satisfactory levels
of capitalisation and loan loss provisioning by the banking sector,
sustained robust gross domestic product (GDP) growth, and a substantial
softening of retail inflation, particularly core inflation, the Indian
banking sector's outlook for 2024 appears robust and healthy.
IANS: What would likely be trend in deposits, credit and other aspects of the banking sector?
We anticipate a moderate acceleration of deposit growth and a
deceleration of credit growth in 2024 compared to 2023, which will
result in a system-wide reduction in the credit deposit ratio. Although
the transmission of previous monetary tightening by the RBI to lending
and deposit rates is nearly complete, it is not impossible for both to
experience a modest increase in 2024.
The anticipated outcome in
the face of the current high credit deposit ratio would be a marginally
higher increase in deposit rates relative to lending rates, leading to a
moderate contraction in the net interest margin.
this, we are also factoring in a marginal escalation in the funding cost
for the financial sector. Consistent with our anticipation of sustained
robust development in India throughout 2024, we do not anticipate a
significant decline in the quality of assets throughout the year.
IANS: Do you see mergers and acquisitions happening in the sector in 2024?
The consolidation among public sector institutions is now complete, and
no additional steps are anticipated in this regard throughout 2024. As
the HDFC twin merger has been finalised, we do not anticipate any
significant consolidation among private sector banks as well during
Old private sector banks continue to be the primary targets
for mergers and acquisitions within the Indian banking industry, just as
they were historically. In 2024, the primary distinct possibilities for
corporate action will be the public offering of a few non-banking
subsidiaries of commercial banks and the secondary capital raise by a
few listed banks.
IANS: Your views on the increased role of technology in the banking sector -- front and back end?
The banking industry has undergone an irreversible process of
digitalisation, and a significant number of Indian banks have
established internal fintech companies. Further, the momentum is
expected to be gained by the process. Intense wage increases and high
employee attrition would serve as additional incentives for banks to
augment their technological investment.
Enhanced data protection
regulations and a rise in the degree of digitalisation would
additionally necessitate that banks increase their investments in
information and cyber security initiatives. The cyber-physical interface
in 2024 will likely be characterised by the expansion of usage of big
data, machine learning, and artificial intelligence.
IANS: In your view, what are the challenges or the headwinds to be faced by the banking sector in 2024?
The combination of the deceleration in corporate investment, lower
working capital need with softer inflation and the likely decline in
bond yields could pose a formidable obstacle for banks seeking to
significantly expand their corporate lending portfolio.
the exponential growth of retail loans and bank lending to non-banking
financial companies, the RBI has adopted a cautious stance. This may
result in a deceleration of such lending activities as well.
cumulative effect may reduce bank credit growth by 300 to 400 basis
points between 2023 and 2024. We also anticipate a moderate decline in
the banking system's net interest margin.
IANS: As to the tail winds...
Due to the robust state of the economy, we do not anticipate a
discernible slippage in the banking system's asset quality. The banking
system's provisioning for loan losses is also robust; consequently, we
do not anticipate that these factors will have any adverse effect on the
profitability of banks.
The combination of India's entry into the
global bond fund index and the probable deceleration of global interest
rates indicates a discernible decline in bond yields. Considerable
surplus holdings of government securities by the banking industry, these
factors may generate substantial treasury income in 2024, particularly
for public sector institutions that possess considerable quantities of
excess SLR (statutory liquidity ratio) securities.
anticipations of a moderate decrease in net interest margin and
deceleration in credit growth, we maintain a positive outlook on the
profitability of Indian banks throughout the year 2024.
IANS: What are your views on other challenges and opportunities?
The likelihood that the RBI will impose more stringent regulations
regarding the credit risk weight for various funding activities and the
tightening of liquidity conditions are additional obstacles confronting
the Indian banking system.
The formalisation of the economy and
the implementation of digital distribution channels to target unbanked
sections of the population present the banking system with substantial
prospects. Additionally, as a result of increased digitisation, banks
may be able to reduce their operating expenses and thereby improve
IANS: Finally can you do a SWOT analysis for public and private banks?
The primary strengths of public sector banks are their extensive
geographic reach, robust franchise for both deposits and credit, and the
public perception of a sovereign guarantee for the deposits with these
Public sector banks face challenges in terms of relatively
high operational expenses, an emphasis on developmental rather than
purely commercial factors when making banking decisions, and an
insufficient incentive structure to encourage audacious commercial and
professional decision-making is needed.
There are substantial
prospects for public sector banks to enhance operational efficiency
through the implementation of incentive-compatible mechanisms that
govern commercial and professional business decisions. Notwithstanding
substantial advancements in professionalism within the public sector
bank in recent years, the overarching developmental goals frequently
impede the bank's business expansion and profitability.
of both deposits and credit, the market share of the public sector bank
has declined substantially over the past decade. The public sector banks
continue to face the risk of additional market share decline unless
they undertake suitable corrective measures. Failure to do so may have
adverse effects on their profitability and valuations.
greatest strengths of the new generation private sector banks in India
are management and strategic continuity, business decision making
agility, and a more accurate evaluation of risk and reward with a clear
emphasis on profitability. Weaknesses of these banks include a
relatively restricted geographic reach, high employee attrition,
particularly among lower-level personnel, and a greater concentration of
credit on particular activities, with some private sector banks
focusing on retail credit in particular.
The resurgence of the new
generation of private sector banks in terms of credit market share in
the last decade can be largely attributed to their increased utilisation
of new technologies, quicker turnover times for business decisions, and
incentive structures that are tied to profitability. These factors also
afford private sector banks the opportunity to further consolidate
their market share.
Threats to private sector bans include an
overextended credit deposit ratio, a greater concentration on particular
segments of retail loans and industry concentration, employee retention
issues, and an increased reliance on high cost funding including bulk
deposits and borrowings.
IANS: What are the regulatory changes that RBI is mulling or can bring in 2024?
The RBI directed its attention towards stimulating the economy in 2020.
Beginning in late 2021, the RBI's focus transitioned to the management
Having restored stability to the economy and
substantially mitigated the imminent peril of elevated inflation, the
RBI is presently in a position to prioritise additional measures aimed
at fortifying the financial system, such as tightening the prudential
Beginning in 2023, the Bank for International
Settlements rolled out Basel 4 standards for implementation over a
five-year period. The primary objective of these norms is to establish a
standardised approach to credit risk weights by limiting the autonomy
of individual institutions in determining the calculation methodology.
This may result in an escalation of capital charges, compelling specific
institutions to seek capital infusions. It is now probable that the RBI
will implement comparable measures for a variety of funding activities.
comparison to the majority of banks worldwide, the Indian banking
system maintains a comparatively high net interest margin. Historically,
such net interest margins were necessary due to the elevated operating
expenses associated with maintaining extensive physical presence.
this, as prudential standards and provisioning requirements became more
stringent, banks were compelled to maintain high net interest margins
to create capital buffer and to make loan loss provisions. Due to the
substantial improvements in asset quality and the proliferation of
digitisation, the rationales for retaining a high net interest margin
are no longer entirely valid.
Banks are permitted to exercise
discretion in determining the cost of funds and implementing customised
mark ups under the existing system, which enables them to maintain a
substantial net interest margin.
There is a good chance that the
RBI would progressively encourage banks to price their loans using
external benchmarks and to be more transparent in determining the margin
over such benchmarks. The procedure may cause Indian banks' net
interest margins to erode gradually, which could have a negative effect
on their profitability and valuations.
(Venkatachari Jagannathan can be reached at firstname.lastname@example.org)