Indian banks set for double-digit loan growth as economy gains ground

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Indian banks are expected to increase lending and improve net interest margins in 2022 as they benefit from the country’s economic recovery.

“Indian banks are poised to enter a growth phase, just in time to meet growing demand as the country’s economy recovers,” said Nikita Anand, associate director of credit risk at S&P Global Ratings. . “Faster loan growth will be bolstered by improving asset quality and a normalization of credit costs over the next 12 to 18 months.”

Overall bank credit growth accelerated to 9.2% year-on-year in December 2021, according to data from the Reserve Bank of India in a January 14 report. This compares to growth of 5.2% in March 2021. HDFC Bank Ltd., India’s largest private sector bank, said its total advances as of December 31, 2021 increased by 16.5% from a year to year.

The World Bank expects India’s economy to grow by 8.3% in the current fiscal year ending in March and 8.7% next year, according to the Global Economic Outlook report published on January 11. By contrast, global economic growth is expected to slow amid surging cases of the omicron variant of COVID-19, and higher inflation, debt and income inequality, the World Bank said. India’s GDP grew 8.4% year-on-year in the July-September quarter, reversing a 7.4% contraction from a year ago, the data shows. published on November 30, 2021.

Better balance sheets and an appetite for lending to small and medium enterprises can lift overall bank credit growth to over 10% in 2022 and between 12% and 13% thereafter. Jefferies said in a January 4 report. Bank credit growth has steadily improved in 2021 on stronger retail demand, economic recovery and a surge in inflation, Jefferies noted.

A stronger base

“Economic activity in India remains strong, with upbeat consumer and business confidence and increases in several high-frequency incoming indicators,” according to a Jan. 17 report from central bank economists. The overall ratio of capital to risk-weighted assets of Indian banks strengthened to 16.6% at the end of September 2021, from 14.8% in March 2020. Their return on assets climbed to 0.8% against 0.2% over the 18-month period, he said.

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Banks can now focus on credit growth after spending previous years monitoring the quality of their assets, said Nitin Aggarwal, research analyst at financial services firm Motilal Oswal. After reducing their bad debts, banks are now better prepared. “We haven’t seen that much stress on the business side,” Aggarwal said.

Asset quality

The banking sector improved asset quality in 2021, with the ratio of gross non-performing assets falling to 6.9% at the end of September, from 8.2% at the end of March 2020, according to the Reserve Bank of India, or RBI. Central bank-led stress tests predict aggregate NPAs will rise to 8.1% by September in a baseline scenario and 9.5% in a severe stress scenario as aggregate lending grows . Still, all banks would be able to comply with minimum capital requirements even under severe stress scenarios, the RBI said in a December 2021 report.

“We don’t see a lot of new stress building up, even from the new wave of COVID, which doesn’t appear to be severe enough to induce large-scale lockdowns,” said Anand Dama, banking analyst at Emkay Global. Most of the formation of larger bad loans is a thing of the past, Dama said.

The government will likely increase infrastructure spending and announce incentives for the agricultural and manufacturing sectors in its budget for the next fiscal year to be presented on February 1. keeping the fiscal deficit under control, Nomura analysts Sonal Varma and Aurodeep Nandi wrote in a January 21 note.

“The government’s fiscal policy since the onset of the pandemic has prioritized growth and fiscal transparency over fiscal consolidation, in hopes that strong medium-term growth prospects will contribute to sustainability. debt,” Nomura wrote. The government will likely announce that it is on track to meet its budget deficit target of 6.8% of GDP in the current fiscal year ending March 31, and set a target of 6.4% for next year, Nomura noted.

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