The boom in India’s banking sector continues, but low deposit rates at some banks point to future risks

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Growing profits

The cumulative net profit of all banks crossed Rs 3 lakh crore in FY 2023-24. In the previous financial year, the overall net profit of banks was Rs 2.3 lakh crore. The country’s largest lender State Bank of India (SBI) reported a net profit of Rs 20,968 crore in March, another 125 per cent rise. This is the highest quarterly profit among all Indian banks. The net profit for the full financial year was also the highest ever at Rs 61,077 crore. Among private sector lenders, HDFC Bank came second with a net profit of Rs 60,812 crore in the last financial year.

Punjab National Bank’s net profit rose to Rs 3,010 crore in March, helped by a 17 per cent year-on-year increase in interest income. It is worth noting that the bank’s interest income and net profit were the highest in 16 quarters.

Among other state-owned banks, Bank of Baroda’s net profit was Rs 4,886 crore for the March quarter and Rs 17,789 crore for the full year, an increase of 26 per cent over last year. However, not all banks recorded an increase in profits. UCO Bank and Punjab and Sind Bank reported a decline in net profit in the last financial year.

Advances and bank asset quality

Most public sector banks recorded credit growth in the range of 11-16 per cent in March 2024. The only exception was Punjab and Sind Bank, where the growth in lending was 6%. In most banks, this growth is driven by retail loans. In some banks, corporate loans recorded slow growth. Indian Overseas Bank reported 4.9 per cent growth in corporate loans compared to 14 per cent growth in retail loans. Bank of Maharashtra also reported slower growth in corporate loans of 5.7% compared to 19% growth in retail loans.

Most banks recorded significant improvement in the quality of their assets. Punjab National Bank recorded a Gross Non-Performing Assets (GNPA) ratio of 5.73% in March 2024 as against 8.74% in March 2023. Similarly, Union Bank of India recorded a noticeable improvement in GNPA ratio to 4.76% in March compared to 7.53 percent in March 2023

Sectorally, retail and corporate loans had lower GNPAs compared to agriculture and small and medium enterprise loans. But there is also improvement. In the case of State Bank of India, the agriculture GNPA ratio decreased from 11.47% in March 2023 to 9.58% in March 2024. Other banks such as Bank of Maharashtra and Punjab National Bank also saw a decline in NPAs in the segment agriculture.

Artwork: Wasif Khan | Printout — Art: Wasif Khan | Printout

The ratio of loans to deposits

A key measure of liquidity is the loan-to-deposit ratio, or the ratio of loans to deposits. It shows how much of the deposits were distributed as loans. If a large proportion of deposits are transferred in the form of loans and there is a sharp increase in the number of withdrawals, there may be a liquidity risk for banks.

There is great variation between banks when it comes to the ratio of loans to deposits. Punjab National Bank recorded a credit deposit (CD) ratio of 71.79% in the March quarter, down from 73% recorded in the December quarter. Deposit growth was also lower at 6.9 percent, but given that the loan-to-deposit ratio of 71 percent was also lower, the bank sees no major concerns for now.

In comparison, Bank Baroda’s CD ratio was 82.18 per cent in March. While this is a moderate difference of 200 basis points from the previous quarter, it needs to be managed through higher deposits.

For banks with a CD ratio above 75%. deposit mobilization would be crucial. As banks compete for higher deposits, banks’ deposit costs will increase slightly, which will consequently impact their net interest margin.

Obtaining deposits and competition from other instruments

Raising deposits will not be easy as banks face stiff competition not only from each other but also from mutual funds and physical assets such as gold and real estate. It is worth paying attention to some numbers here. The share of stocks, bonds and mutual funds in household savings has seen a noticeable increase in the post-Covid-19 period. Central Statistical Office data indicate an increase in household savings in fixed assets.

Mutual fund assets under management (AUM) stood at Rs 57.3 lakh crore as of April, registering a growth of 37.5 per cent over last year.

In turn, bank deposits recorded an increase of 15% in March 2024. The continuing boom has forced investors to invest their savings in systematic investment plans (SIPs). SIP fund inflows touched a record Rs 20,371 crore in April. The number of active SIP accounts increased to 8.7 crore in April. In the face of a clear change in investor preferences, obtaining deposits would require an increase in interest costs. Banks will have to prepare for an increase in interest costs in the coming quarters.

Radhika Pandey is an Associate Professor and Madhur Mehta is a Research Fellow at the National Institute of Public Finance and Policy (NIPFP).

Views are a personal matter.

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