Banks should improve corporate loans, keep deposit base healthy

Much of the credit growth during 2023-24 was driven by retail loans, while corporate loans saw a tepid rise.
Image used for representational purposes only.
Image used for representational purposes only. (Photo | RDNE/Pexels)

For the first time ever, the cumulative net profits of Indian banks surpassed Rs 3 lakh crore in 2023-24, up from Rs 2.3 lakh crore in 2022-23. The rise was driven by healthy loan growth and increase in banks’ other income, though the net interest margins for some were weighed down by the rising cost of funds. While the 26 private lenders’ net profits shot up 42 percent to Rs 1.78 lakh crore, the 12 public sector banks (PSBs) reported net profits of Rs 1.41 lakh crore in 2023-24, a 34 percent increase.

Some PSBs, including Bank of India, Bank of Maharashtra and Indian Bank, saw their profits jump over 50 percent in 2023-24. Above all, behemoth SBI turned in the biggest quarterly net profit by any Indian bank at Rs 20,968 crore during the March quarter, a stellar 125 percent increase.

The latest numbers validate that PSBs have indeed turned the corner. From record losses of Rs 85,390 crore in 2017-18 to record profits in 2023-24, state-run banks have come a long way. The gross non-performing assets (NPAs) or bad loans, which peaked to 14.6 percent of total loans in 2017-18 and threatened the existence of some weak banks, are likely to print lower at 3 percent or below in 2023-24.

Importantly, PSBs, which accounted for about 80 percent of the total industry’s NPAs, have significantly improved their asset quality. That said, NPAs are likely to rise this fiscal and while a marginal increase in bad loans is unavoidable, banks should remain vigilant.

Unarguably, the reforms undertaken in the last five years helped improve credit discipline, brought back responsible lending and improved governance. If the government provided much-needed support by infusing Rs 3.1 lakh crore to recapitalise PSBs between 2016-17 and 2020-21, the mega mergers not only led to consolidation but also allowed weaker banks to merge with stronger lenders who raised capital on their own.

However, much of the credit growth during 2023-24 was driven by retail loans, while corporate loans saw a tepid rise. This needs to improve as the latter provides impetus to growth. Another key challenge for banks will be maintaining a healthy deposit base given that household savings are falling in favour of physical assets. This could affect banks’ net interest margins in 2024-25, as they would need to pay higher interest to attract deposits.

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The New Indian Express