Stock prices today are an indicator of tomorrow’s profits. Of all the sectors, share prices of public and private sector banks carry a lot of weight. The banking and financial services segment accounts for a third of the NSE Nifty value. Lately, though, the weight of the banks in the benchmark indices has declined. It is probably the lowest seen in five years.
The Nifty Bank index has underperformed the Nifty 50 in 2024. Despite India being the fastest-growing large economy and promising financialization of savings on a large scale, stock market investors are not excited about the prospects for profits in the sector.
In the first quarter of 2024-25, there is a visible decline in the net interest income growth of banks, according to India Ratings, an affiliate of the global credit ratings agency, FITCH. The agency blames slower loan growth at 13.9% in the first quarter compared to 16.3% in the year-ago period. Banks also struggle to maintain deposit growth as it lags behind loan growth. As a result, banks must increase deposit rates to retain money from depositors. That probably explains the pressure on bank profits.
A survey by the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Indian Banking Association reveals that the outlook on expectation for growth of non-food industry credit over the next six months is optimistic, with 62% of the participating banks expecting non-food industry credit growth to be above 12%. However, it reconfirms the current decline in savings accounts (CASA). The higher value is considered suitable for the banking industry, while a falling value of the CASA ratio means the cost of funds is rising for banks.
The Indian banking sector needs to be much bigger than today if India has to achieve the dream of being a developed country by 2047. A struggling banking sector would hurt India’s growth prospects.
India’s infrastructure investment requirement is about a 10th of the GDP. Over 2024-30, it is estimated that infrastructure investment will need to rise to $ 1.7 trillion (R143 lakh crore), with about $ 0.4 trillion in green investments, according to a recent speech by RBI’s deputy governor Michael Debaprada Patra.
The Indian banking sector, with its deposits of R200 lakh crore, will play a crucial role in financing along with other sources. However, if banks struggle to maintain deposits, that may slow the credit growth and stall India’s march towards a developed nation status.
What does it mean to your money
A high demand for credit and a slow deposit growth mean banks are in no hurry to cut rates. If deposit rates remain high, your loans stay elevated, too. While the RBI watches the outlook for consumer price inflation closely to determine the overall borrowing rates, a high demand for credit and a low demand for deposits will not bring down the cost of money for banks. Your bank deposit rates would continue to hold their ground.
If you are an investor in the banking sector, you are riding through a phase of stagnancy. Banks’ share prices are unlikely to increase sharply without a significant expansion in bank profits. A key parameter to evaluate banks’ profitability is the net interest margin. In simple terms, it is the difference between the cost of funds to the banks and that of the average lending rate of banks. It is likely to remain stagnant, according to most experts.
Banks may have to expand their loan portfolio by lending more aggressively to those who have never taken a loan. Banks lend at low rates to top-rated companies.
They charge a higher interest rate to small and medium businesses as the risk associated with them is higher. Banks can easily double their lending to small businesses as they are estimated to account for 32% of India’s GDP, 45% of exports and 62% of employment in the business sector.
RBI deputy governor Patra highlighted that in the same speech. However, the risk assessment capability of Indian banks is still evolving. They prefer lending to top-rated firms rather than taking chances with unrated or low-rated small businesses.
RAJAS KELKAR
(The author is editor-in-chief at www.moneyminute.in)