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Last updated: 01 Jan, 2024  

bank-THMB.jpg Indian banks to see 'moderate growth' in deposits, 'deceleration in credit'

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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?

Hajra: 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?

Hajra: 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.

Aligned with 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?

Hajra: 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 2024.

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?

Hajra: 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?

Hajra: 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.

Regarding 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.

The 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...

Hajra: 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.

Despite our 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?

Hajra: 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 profitability.

IANS: Finally can you do a SWOT analysis for public and private banks?

Hajra: 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 banks.

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.

In terms 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.

The 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?

Hajra: The RBI directed its attention towards stimulating the economy in 2020. Beginning in late 2021, the RBI's focus transitioned to the management of inflation.

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 standards.

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.

In 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.

Following 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

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