Indian banks have experienced an uptick in credit offtake, signaling growth in the third quarter (Q3) of the financial year ending December 2023. With a combination of high credit off-take and lower credit costs, these banks are projected to report a 16.7% year-on-year increase in net profit. CareEdge Ratings’ earlier report highlights that among various factors, Non-Banking Financial Services (NBFCs) have been a primary driver in bank credit performance. Additionally, the surge in personal loans and services segments also contributes to the increased loan disbursement.
NBFCs, trade, and commercial real estate have played crucial roles in enhancing sector performance over the past year. This robust growth is attributed to consistent, healthy loan disbursements by NBFCs, particularly smaller ones reliant on the banking system. The HDFC Bank merger also significantly influenced credit off-take.
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Despite this increase in credit off-take, Bloomberg estimates that net profit is likely to decrease by 2.4% sequentially from the second quarter (Q2) ending September 2023. This trend is anticipated for both private and public sector banks.
While loan off-take has led to steady year-on-year bottom-line growth, net interest margins (NIMs) are under pressure. This margin pressure is evident in the profits on a sequential basis. However, net interest income (NII), a key revenue source for lenders, is expected to rise by 11.2% year-on-year in Q3.
The Implications of High Credit Offtake
High credit off-take typically indicates a thriving economy. Increased borrowing demand is often channeled into investments, consumption, and business expansion, offering insights into the economy’s health. A strong economy with rising income and job creation usually leads to higher borrowing demand. When businesses and individuals take out more loans, it implies confidence in the economy and a commitment to growth and expansion.
India’s post-pandemic recovery has led to a heightened demand for loans across sectors such as infrastructure, manufacturing, and retail. This is noteworthy, especially considering the Reserve Bank of India’s (RBI) caution to NBFCs and small finance banks about prudent lending practices.
On November 16, 2023, the RBI tightened regulations for unsecured consumer credit due to a surge in unsecured loans, such as personal loans and credit card spending. Policy Circle noted that this move might have a cascading effect on the economy, as reduced credit access could hamper growth. Reduced government lending can affect companies’ capital expenditure growth, often leading them to postpone new investments.
However, credit off-take is not without risks. Indian banks have a history of extending loans to unreliable borrowers, leading to non-performing assets (NPAs) and an increase in bad loans. Excessive loan growth, if unchecked, can backfire. A mismatch between loan demand and deposit availability can lead to liquidity issues for banks, potentially stifling economic activity and, in extreme cases, triggering a financial crisis, as seen in the 2018-2019 NBFC crisis. Therefore, it is imperative that banks and financial institutions maintain high lending standards, conduct thorough credit assessments, and vigilantly monitor credit quality.
2024 Outlook for Indian Banks
Globally, banks are expected to face various challenges in 2024, affecting their income generation and cost management, as per Deloitte’s banking sector outlook. However, as the Indian economy remains among the fastest-growing major economies, banks in India are likely to continue seeing favorable conditions for business and revenue growth in 2024, albeit at a more moderate pace than in 2023, according to Fitch Ratings. Fitch anticipates a diverse performance across the Asia Pacific (APAC) banking sector, with India, Indonesia, Sri Lanka, Thailand, and Vietnam projected to show improved results.
Bank gains from treasury income are expected to be modest, as bond yields remained high at the end of December 2023 compared to the previous quarter. Meanwhile, high expenses due to ongoing technological investments and branch expansion may affect operating expenditure rates.