The Great Indian banking turnaround -Anirvan jena

As we stand at the anvil of 2023 , the PSBs are again in news ...for the good reasons . After series of frauds, losing of the share to private lenders , rising operational costs and depriving capital to support lending , finally the PSBs stocks are shining . In the last few months, the PSU banks have been on the mind of traders and investors due to their outperformance against the private banks.

Public sector banks recorded a combined net profit of Rs 25,685 crore in the July-September period, a rise of nearly 50 per cent from the same period a year ago. The country’s largest lender, State Bank of India (SBI) reported the highest-ever quarterly net profit in the three months to September — an increase of 74 per cent over the corresponding quarter of the previous year. Similarly, Canara Bank reported a net profit of 89.4 per cent.

Since June 2022, the PSU Bank index has rallied 70%. But what has been the underlying reasons for this turnaround and is this turnaround a proxy for recovery in the economy after two years of sluggish growth ?

In my analysis , I cater to 3 most important factors that have contributes to PSBs recent profitability .

1. Growth in loan portfolio not just from the corporate sector but also from all personal loan areas like auto loans and housing loans . This shifting pattern of more retail lending from corporate lending shows the improvement in the outlook of retail customers towards the Indian economy . Despite rising deposit rates , the pace of lending to the retail sector has been a major source of earning net interest margins . For all PSBs listed in NIFTY , the average net interest income margins have been around 3 -4% . The CASA ratio for the PSBs has also improved compared to their peers in the private sector.
2. Declining Gross NPAs - Indian public banks have one of the healthiest and clean balance sheet over a decade now . Bankers have been for a long time hankering the problem of twin balance sheet problem , willful defaulters and excruciating process of restructuring and corporate resolution .This process got much need reform from IBC 2016 , which made insolvency and filing of bankruptcy faster . The clarity between financial and operational creditors gave the banks a helpful hand . Now no longer the family members can participate in the bidding process and save their chair . This was the nail in the "Phone call culture" that was earlier rampant in PSBs . The new stringent asset recognition norms and Strict provisioning saw banks profit decline in initial years but as the reforms were deepened , The gross NPAS which were earlier hovering around 8-9% have now come down to 5% . This has allowed the banking sector to have the much required maneuver and the breathing space to their lending practice . The credit to deposit ratio has also improved during the same period

During the time of covid , many large corporates started the process of deleveraging their balance sheet .The stream of income began to flow in the banks and asset quality began to improve . The ELSS scheme launched by the Indian Government which prevented MSEs from being bankrupt and provided the essential working capital To support their operations which kept the loan portfolios healthy . The repayment rate has improved in the case of borrowers who availed ECLGS compared to overall repayment trends in the MSME market.

3. Recapitalization and Mergers - One of the stinging issues for the banks have been inability to raise capital from markets at cheaper rates to support their lending operations . In last 5 years , GOI has recapitalized banks to tune of 3.5 lakh crores to meet banks capital adequacy norms . The bank mergers have also increased the operational synergy , bringing complimentary strengths in IT integration and better risk taking appetite .