CRISIL Ratings hosted a webinar titled, ‘Banking on a new note’ to discuss growth and asset quality outlook, trends in overall earnings, and capital requirements. The webinar was followed by a panel discussion with Mr. Rakesh Jha (Executive Director of ICICI Bank), Mr. KVS Manian (Whole-Time Director and Group President of Kotak Mahindra Bank), Mr. Arun Khurana (Deputy CEO of IndusInd Bank), Mr. Sanjay Agarwal (MD and CEO of AU Small Finance Bank), and Mr. Pralay Mondal (MD and CEO of CSB Bank). Here are the key takeaways:
Buoyancy in credit growth to go on; Retail and MSME to be the key drivers
- After undergoing an elevated period of Balance Sheet fortification, the focus is now shifting towards expansion of credit growth. The credit profile of Banks across the industry has been stable, with an improvement across most parameters. While credit growth in the past few years has been largely driven by Retail, the same for the Corporate segment is seeing healthy signs of a pick-up. Corporate credit is largely driven by working capital requirements as private capex is still a few quarters away.
- While Corporate credit will pick-up gradually, the Retail and MSME segment will remain the key growth driver. Home and Unsecured loans will continue to keep Retail growth healthy. CRISIL expects overall loan growth to pick up to 14-15% CAGR over FY22-24, with the key risks being rising inflation and interest rates. Among segments, it expects Retail/MSME/Agri/Corporate to grow at 17-19%/16-18%/8-10%/10-12%.
Garnering deposits to be a challenge; competitive intensity to increase
Over the past few quarters, there was a faster growth in credit vis-à-vis deposit growth, given the excess liquidity and as Banks were focusing on a gradual deployment of the same. While the increase in deposit rates so far has been controlled, it is expected to rise at a faster pace in coming months. The panelists believe that deposit growth will be in focus over the next six months, given the RBI's stance on further rate hikes and tightening liquidity. As a result, deposits rates are likely to increase, which will intensify the competition to garner additional deposits to fund the increase in lending. This, in turn, will boost deposit growth.
Margin to exhibit a positive bias; a high mix of floating loans to aid margins
The mix of floating rate loans remains high ~80%, within which the mix of EBLR loans has increased to 44% in FY22 v/s a mere 2% in 1HFY20. This has resulted in faster re-pricing of the asset book in a rising interest rate environment, which, coupled with higher rates on incremental loans, will benefit yields. While deposit rates will see an increase, the same is likely to be lower than the rise in yields. Hence, margin is likely to exhibit a positive bias. CRISIL expects overall margin to improve to 3% in FY23 v/s 2.9% in FY22, with the key monitorable being the greater dependence on high-cost bulk deposits.
Buoyancy in credit growth to go on; Retail and MSME to be the key drivers
- After undergoing an elevated period of Balance Sheet fortification, the focus is now shifting towards expansion of credit growth. The credit profile of Banks across the industry has been stable, with an improvement across most parameters. While credit growth in the past few years has been largely driven by Retail, the same for the Corporate segment is seeing healthy signs of a pick-up. Corporate credit is largely driven by working capital requirements as private capex is still a few quarters away.
- While Corporate credit will pick-up gradually, the Retail and MSME segment will remain the key growth driver. Home and Unsecured loans will continue to keep Retail growth healthy. CRISIL expects overall loan growth to pick up to 14-15% CAGR over FY22-24, with the key risks being rising inflation and interest rates. Among segments, it expects Retail/MSME/Agri/Corporate to grow at 17-19%/16-18%/8-10%/10-12%.
Garnering deposits to be a challenge; competitive intensity to increase
Over the past few quarters, there was a faster growth in credit vis-à-vis deposit growth, given the excess liquidity and as Banks were focusing on a gradual deployment of the same. While the increase in deposit rates so far has been controlled, it is expected to rise at a faster pace in coming months. The panelists believe that deposit growth will be in focus over the next six months, given the RBI's stance on further rate hikes and tightening liquidity. As a result, deposits rates are likely to increase, which will intensify the competition to garner additional deposits to fund the increase in lending. This, in turn, will boost deposit growth.
Margin to exhibit a positive bias; a high mix of floating loans to aid margins
The mix of floating rate loans remains high ~80%, within which the mix of EBLR loans has increased to 44% in FY22 v/s a mere 2% in 1HFY20. This has resulted in faster re-pricing of the asset book in a rising interest rate environment, which, coupled with higher rates on incremental loans, will benefit yields. While deposit rates will see an increase, the same is likely to be lower than the rise in yields. Hence, margin is likely to exhibit a positive bias. CRISIL expects overall margin to improve to 3% in FY23 v/s 2.9% in FY22, with the key monitorable being the greater dependence on high-cost bulk deposits.
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