NEW DELHI: After a smooth recovery in the last quarter of 2020-21, the renewed onslaught of the Covid-19 pandemic and the consequent partial lockdowns have put the brakes on Indian banks’ growth momentum.
With pressure on asset quality and credit growth remaining in the range of 5-5.7 percent, the industry is set to report muted earnings for the first quarter of 2022 (Q1 FY22). “Private banks, with healthy capitalisation, may grow at 8-10%, gaining market share from public banks. Sequentially, the growth is expected to be muted at 1-2% as the first quarter is generally a slow quarter and lockdowns have further added pressure,” analysts at ICICI Direct said.
A number of banks have already disclosed provisional estimates on key business parameters for the quarter ended June 2021, which reflects lower retail disbursement primarily due to the adverse impact of the second wave, resulting in the outstanding retail loan book to contact. For instance, India’s most valuable lender HDFC Bank has seen a 30% quarter-on-quarter contraction in retail disbursement. In absolute terms, disbursements stood at Rs 43,600 crore, lower than Rs. 62,500 crore disbursed during the previous quarter, as per provisional data. In the case of Yes Bank, retail disbursement fell 34.86% in the June quarter over the March-ended quarter, leaving a dent on the overall loan book.
Similarly, Federal bank and CSB Bank, too, saw their loan books contract 1.56% and 3.52%, respectively, on a sequential basis. IndusInd Bank saw its net advances fall 1% in Q1 FY22. Smaller peers like AU Small Finance Bank saw a 60.5% decline and Equitas Finance Bank reported a 50% fall in disbursements, hurting their overall loan book.
On the asset quality front, divergence is expected in delinquencies based on loan mix wherein exposure to MSME and MFI segments could remain under pressure.
Collection efficiency, as lead indicators suggest, has seen a meaningful 10-35% dip in April and May with microfinance institutions seeing steepest decline of 35%. Collections improved in June, but it still remained below March levels.
“Business activity was impacted over Apr-May and we believe Q1 FY22 to be a quarter of consolidation as the momentum in recovery gained over Q4 FY21 was impacted by the second wave, with the asset quality outlook deteriorating once again. While economic activity has started to pick up since June, we expect business growth to remain modest over Q1 FY22 and estimate systemic loan growth of 9% for FY22. Growth in working capital requirements in the corporate segment would be another monitorable,” wrote analysts at Motilal Oswal in a note.
During the April-June period, the gross non-performing assets (NPA) ratio is set to increase 20 bps sequentially to 5.3%. While larger private sector banks may see about 5-15 bps sequential rise in GNPA, analysts expect mid-sized banks such as City Union Bank and Bandhan Bank to see higher delinquencies. Meanwhile, the only silver lining is that banks have made enough provisions to cover the loss. Large banks such as ICICI Bank, State Bank of India, Bank of Baroda, HDFC Bank and Axis Bank are better placed in terms of having sufficient provisioning buffers even as the provision coverage ratio for most banks is now over 70 per cent.
Traction on deposits, however, is expected to remain healthy at 10-11% on a year-on-year mark, with largely stable CASA to be maintained by most banks.
As on June 18, 2021, the liquidity surplus in the banking system stood at Rs.4.2 lakh crore. In fact, there is a liquidity surplus in the system, which is attributed to deposit growth consistently outpacing credit growth. In the June quarter, the growth in deposits moderated to 10.3%, but has increased to Rs. 153 lakh crore from Rs. 140.8 lakh crore in the year ago quarter.
Analysts say slippages would remain high, driven by retail and MSME loans throughout the first half of FY22 which could also result in higher restructuring. On the other hand, credit growth is expected to remain tepid amid weak demand, despite the all-time low interest rates, and risk aversion among banks fearing rise in defaults. The languishing credit growth is always because corporates have been rapidly deleveraging by repaying high cost loans through funds raised via bond issuances. "Corporate willingness for new investments remains tepid as the economy is still recovering from the devastating second wave," said Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.