India’s banking sector is poised for a stellar year as the total profit of public sector banks will reach Rs 1.50 lakh crore in the fiscal year 2024. The encouraging financial outlook is attributed to higher credit demand fueled by robust economic growth.
During the initial six months of the current financial year, public sector banks already amassed approximately Rs 68,500 crore in profits, and this positive trajectory is expected to continue unabated in the second half.
The projected net profit of around Rs 1.50 lakh crore for FY2024 signifies a notable increase from the Rs 1.04 lakh crore recorded in FY2023. Factors contributing to this optimistic forecast include stability in non-performing assets (NPAs), robust credit demand, and a high-interest rate regime.
Kotak Mahindra Bank Whole Time Director Shanti Ekambaram highlighted the strength of the underlying economy, emphasizing that banking flourishes when the overall economy performs well. The Reserve Bank of India’s recent revision of India’s growth projection from 6.5 percent to 7 percent further underscores the positive economic momentum.
The growth, Ekambaram noted, has been robust, with credit demand initially emerging in the retail segment 18 months ago and now extending to capital expenditure. However, she pointed out the challenge of slower deposit growth compared to credit growth.
While deposit growth has seen some increase, there remains a significant gap of about 500 basis points compared to loan growth. Aggregate deposits with banks increased by 12.2 percent during the April-November 2023 period compared to 9.3 percent a year ago.
Credit growth moderated to 16.4 percent as of December 1, 2023, from 17.5 percent a year ago, as per the latest RBI Bulletin. The slower deposit mobilization could limit room for rate reduction, as indicated by RBI Governor Shaktikanta Das in October, stating that interest rates would remain high for some time.
Despite these challenges, the demand for housing, car, education, and personal loans is expected to continue witnessing double-digit growth. The Net Interest Margin (NIM) is anticipated to remain at over 3 percent for most banks due to the elevated interest rate levels.
A key positive factor for the banking sector is the decline in Non-Performing Assets (NPAs) to a comfortable level. The government’s 4Rs strategy of Recognition, Resolution, Recapitalization, and Reforms has played a crucial role in managing NPAs. According to RBI data, Gross NPAs of Scheduled Commercial Banks decreased from Rs 8,35,051 crore (GNPA ratio of 7.33 percent) as of March 31, 2021, to Rs 5,71,544 crore (GNPA ratio of 3.87 percent) as of March 31, 2023.
The robust performance of banks in the first half of the current fiscal year is supported by a well-capitalized banking system that has seen increased credit disbursement to the retail, industry, and services segments.
While the financials of the banking system improved, there were instances of fraud, with UCO Bank and Bank of Baroda witnessing cyber frauds. The finance ministry convened a meeting in November to address cyber security issues in the financial services sector and increase incidents of online financial frauds.
As India’s banking sector gears up for a promising fiscal year, stakeholders remain vigilant in addressing challenges and maintaining the momentum of growth.
