The year 2022 for banks has brought healthy loan growth and profitability. This in turn has meant that the challenge of growing the loan books in the face of rising interest rates has not become daunting as yet, and banks say they are in a pretty strong position to deal with these challenges come the new year.
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Bankers have a reason to smile as they move away from the pain of the bad loan or NPA (non-performing asset) cycle to healthy long growth and profitability. Profits for the sector on a quarterly basis have increased from Rs 36,854 crore in the second quarter last year to a whopping Rs 58,717 crore in the same period this financial year.
The loan growth for the banking sector as of Q2 FY23 was at 16.44 percent perhaps one of the highest from the first of November 2013.
The rise in loan growth helped in stronger topline growth for the banking sector, which has helped the bottom line or the earnings of the banks. So, the loan growth incrementally has been driven by the retail segment.
The corporate sector has now started to come back for working capital loans as money market rates have shot up through the roof. So the capital expenditure (capex) based demand going ahead may augur well for a healthy loan growth rate for the banking sector.
Stronger loan growth has also translated into healthy operating profit growth for the banking sector. Operating profits of the sector have grown from Rs 97,383 crore in Q2 FY22 to a little under Rs 1,15,000 crore as of Q2 FY23.
Stress reduction, the banking sector has seen its gross NPA ratio decline from 7.4 percent in Q2 FY22 to right now about 5.24 percent in Q2 FY23. In value wise that decline has been 15.2 percent year-on-year in Q2 FY23.
The declining gross NPA amount-wise has largely been led by the PSU banks. Now, PSU banks' gross NPA value-wise has declined by 15.9 percent year-on-year that is from Q2 FY22 to Q2 FY23 while that of private sector banks has declined by 12.7 percent in the same period. So, PSU banks the gross NPA ratio has declined by 256 basis points from Q2 FY22 to Q2 FY23. While that of private sector banks has declined by 119 basis points in the same period.
Bank's balance sheet has strengthened with that core provision coverage ratio increasing from 69.7 percent in Q2 FY22 to right now about 74.6 percent in Q2 FY23.
PSU banks co-provision coverage ratio has increased to 74.9 percent in Q2 FY23 when compared to a little under 70 percent in Q2 FY22 and that of private sector banks has increased to 74.4 percent in Q2, FY23 versus 69 percent that they had a year ago.
So for 2023, the loan growth could remain strong and could be in double digits. Net interest margin will continue to expand till Q4 FY23 results as loans are getting re-priced faster and at a healthier rate. Return ratios will expand as credit costs will come down and stress in the balance sheet will continue its downward trajectory.