Tough Time Ahead For Banking Sector

What do City Union Bank Ltd, Karnataka Bank Ltd, Bandhan Bank Ltd, South Indian Bank Ltd, DCB Bank Ltd, and Punjab & Sind Bank have in common? All have at least 1 per cent net non-performing assets (NPAs).

And, what is the common thread among Axis Bank Ltd, HDFC Bank Ltd, ICICI Bank Ltd, IDBI Bank Ltd, Karur Vysya Bank Ltd, Kotak Mahindra Bank Ltd, Tamilnad Mercantile Bank Ltd, Federal Bank Ltd, Bank of Maharashtra, Indian Bank, Indian Overseas Bank, and Punjab National Bank? They are at the other end of the spectrum. This group of a dozen banks has less than 0.5 per cent net NPAs.

We are talking about the December quarter earnings of listed universal banks.

What about gross NPAs? Bandhan Bank, Jammu & Kashmir Bank Ltd, and Punjab National Bank have at least 4 per cent bad loans, while Axis Bank and HDFC Bank have less than 1.5 per cent gross NPAs.

The good story is that in the December quarter of 2024-25 (FY25), in percentage terms, more banks recorded lower gross and net NPAs than those that saw higher NPAs.

However, in absolute terms, private banks' gross NPAs have marginally risen — from Rs 1.35 trillion in September 2024 to Rs 1.39 trillion in December. A year ago, in December 2023, this was Rs 1.37 trillion (all figures rounded off).

A similar trend is seen in net NPAs, which increased to Rs 36,260 crore in the December quarter from Rs 34,843 crore in September and Rs 33,116 crore in December 2023.

For public sector banks (PSBs), the gross bad loan burden is declining. Gross NPAs fell from Rs 4.93 trillion in December 2023 to Rs 4.57 trillion in September 2024, and further to Rs 4.47 trillion in December. Net NPAs also declined, from Rs 1.12 trillion in December 2023 to Rs 99,675 crore in September 2024, and Rs 99,556 crore in December.

The Reserve Bank of India’s (RBI’s) measures to limit banks' exposure to unsecured personal loans appear to have worked. In November 2023, the RBI raised risk weights on unsecured credit, making such lending costlier for banks as they needed more capital for such loans. By reining in banks’ exposure to this segment, bad loans have been kept in check.

Net interest income (NII) — the difference between the interest a bank earns on loans and the interest it pays on deposits — rose 8.88 per cent year-on-year for private banks in the December quarter, from Rs 93,416 crore to Rs 1.02 trillion. Quarter-on-quarter, the increase was just 1.51 per cent.

The trend is similar for the PSBs. Their NII grew 5.44 per cent year-on-year to Rs 1.07 trillion, but only 1.06 per cent quarter-on-quarter.

The other income in the December quarter, which includes fees, commission and treasury income, grew 10.2 per cent year-on-year for private banks, but fell 1.7 per cent quarter-on-quarter. For PSBs, the year-on-year growth was higher at 14.04 per cent, but the quarter-on-quarter decline was sharper – 18.64 per cent.

Interestingly, the provision for bad loans that private banks made rose both year-on-year and quarter-on-quarter, but for PSBs, there was no clear trend. In the December 2023 quarter, private banks had provided Rs 10,997 crore for bad loans. The amount rose to Rs 13,134 crore in the September 2024 quarter and further to Rs 14,149 crore in December. PSBs had provided Rs 12,495 crore in the December 2023 quarter; it rose to Rs 16,445 crore in the September 2024 quarter before dropping to Rs 10,193 crore in the December 2024 quarter.

Finally, the collective operating profit of private banks rose 10.6 per cent, to Rs 75,315 crore, in the December quarter; quarter-on-quarter, it remained flat. Post provisioning, their net profit rose 3.79 per cent year-on-year to Rs 46,374 crore, but quarter-on-quarter, it dropped 2.48 per cent.

At Rs 70,218 crore, the year-on-year rise in operating profit for PSBs in the December quarter was 13.28 per cent, but quarter-on-quarter, it dropped 10.72 per cent. The year-on-year rise in net profit for this set of banks was a staggering 46.81 per cent, at Rs 44,474 crore, but quarter-on-quarter, it dropped 2.36 per cent.

Before we end, let’s look at two of the most important profitability metrics for banks: The percentage of low-cost current and savings accounts (Casa) of total deposits; and the banks’ net interest margin (NIM), which is loosely the difference between what a bank spends on deposits and what it earns on loans, in percentage terms.

Six banks – two private and four PSBs – have been able to raise their Casa ratio in December over September, but only marginally. Among them, Yes Bank’s Casa during this period rose from 32 per cent to 33.1 per cent; for Union Bank of India, the rise was from 32.72 per cent to 33.43 per cent; Punjab & Sind Bank, 30.43 per cent to 31.16 per cent, and Indian Overseas Bank, 42.44 per cent to 43.37 per cent. For the Federal Bank and Central Bank, the rise was wafer thin.

Barring ICICI Bank and IDFC First Bank Ltd, all listed banks’ Casa ratio fell in the December quarter, year-on-year. ICICI Bank’s Casa rose from 39.6 per cent to 40.5 per cent, although quarter-on-quarter, it slipped in the December quarter from 40.6 per cent in September quarter. A similar trend is seen for IDFC First Bank.

Bank of Maharashtra has the highest Casa (49.28 per cent), followed by Central Bank of India (49.18 per cent), Jammu & Kashmir Bank (48.17 per cent), IDFC First Bank (47.7 per cent) and IDBI Bank Ltd (46.35 per cent). None of the banks in either category has 45 per cent Casa. A few have at least 40 per cent or more. This list includes Kotak Mahindra Bank, ICICI Bank and India Overseas Bank. Of course, Casa percentage alone doesn’t tell the whole story. We need to see the cost of Casa as well. This widely varies from bank to bank.

Meanwhile, most banks have reported lower NIM in the December quarter. The exceptions are IDBI Bank, Jammu & Kashmir Bank, Central Bank of India, Punjab & Sind Bank and Uco Bank. Their NIM has progressively risen quarter-on-quarter as well as year-on-year. Yes Bank’s NIM has remained unchanged.

Bandhan Bank enjoys the highest NIM (6.9 per cent), followed by IDFC First Bank (6.04 per cent). The only other bank that enjoys 5 per cent or higher NIM is IDBI Bank (5.17 per cent). NIM has to be seen in the context of a bank’s credit portfolio. Typically, if a bank has higher exposure to unsecured credit, it enjoys higher NIM, but it needs to be careful about the credit cost or quality of assets.

RBI monetary policy’s recent quarter per cent rate cut will impact banks’ NIM further. Typically, all retail loan rates are linked to an external benchmark such as repo rate. The cut in repo rate is forcing banks to slash such loan rates even though there is no change in their cost of funds as they are not paring their deposit rates. Corporate loans are linked to banks’ cost of funds. Banks have been raising rates for such loans to take care of their cost of deposits. Till the war for deposit continues, banks’ NIM will remain under pressure.

Given the sharp correction in equities and a drop in the flow of money to mutual funds, some banks have started seeing a return of depositors. Let’s wait and watch.

This column first appeared in Business Standard.

The writer, a Consulting Editor of Business Standard, is a Senior Adviser of Jana Small Finance Bank

Writes Banker's Trust every Monday in Business Standard.

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