In the last one year, the banking sector has evolved. Earlier, investors made a clear distinction between public sector banks and private sector banks. Today, they differentiate between strong private sector banks and less strong private sector banks. There is a heightened perception of quality among investors. This can be gauged by looking at how stock prices have moved in the last one year. While stocks like Kotak Mahindra Bank and ICICI Bank were up 15-25%, Yes Bank declined 80%, RBL Bank was down 31% and IndusInd Bank nosedived 29%. Private sector banks and public sector banks are no longer a homogeneous entity.
As the economy nudges ahead, banks will shape the growth story. With the economy caught in the crosswinds, the GDP growth estimates are being lowered. A triangulation of downside risks like an inadequate monsoon, slowing global growth and sluggish high-frequency data are making everyone nervous. Where does the financial system stand? Barring a few, public sector banks have remained incapacitated due to rising bad loans. Non-Banking Financial Companies ( NBFCs) are battling liquidity crisis. So, the burden of banking is on the private sector. At an industry level, gross bad loans may have peaked, but credit growth is also slowing down. Will there be a turnaround this festive and marriage season?
The sharp deterioration in asset quality in the last few years led to accelerated provisions among all PSBs, according to India Ratings. This caused banks to suffer massive losses, which in turn led to failure in meeting objectives of the Indradhanush scheme such as recapitalizing banks based on their performance and their ability to support credit expansion. In reality, the capital infused by the government and LIC was consumed to tide over losses resulting from provisions required on non-performing assets. From a high of nearly 16% at the end of FY17, PSBs gross NPA ratio has come down to 12.6% in FY19.
During the same period, credit growth of PSBs has jumped from almost nothing to 9.6%. Private sector banks, all along, have shouldered the burden of keeping bad loans low as well as growing credit in the economy. Despite 110 basis point cut in repo rates by the RBI, it looks as if private sector banks are reaching their full capacity. Sample this: credit growth by private sector banks has remained at 21% level at the end of FY18 and FY19. Recent data i.e. for the first six months of FY20 show that retail loan growth has tanked to a five-year low of 7.3%. The January-June period growth never slipped below 8% in 2015, 2016 and 2017. When the Index of Industrial Production (IIP) growth dropped to a four-month low of 2.0% in June 2019, many missed an important point about the consumer durables sector. It declined by 5.5% YoY. "There is hope that demand revival should emanate from the upcoming festive season and 35 bps cut in the repo rate to 5.4% by the RBI. Whereas we believe that there is a need for a strong reflationary drive to stir demand conditions," argues Kruti Shah, economist, Emkay Global Financial Services.
If domestic consumption is indeed slowing, this means an important part of the credit growth system is being put to sleep: retail segment. Consumer loans have traditionally been the mainstay of NBFCs, who are facing a dilemma of their own. The IL&FS defaults brought to the fore the fragile nature of NBFCs. Funded by banks and mutual funds, NBFCs lent money onwards. That tap from banks and MFs started slowing down as risk aversion set in. The NBFCs inability to lend had a negative effect on consumption. The government, perhaps, realized this late, and started nursing the NBFCs. There is now a government’s credit guarantee scheme for purchasing pooled assets from NBFCs and on-lending facility under PSL (Priority Sector Lending) norms. Although there is an appreciation for the current measures as they provide a ray of hope for struggling NBFCs with decent retail portfolios, worries about promoter backing and Asset-Liability Management (ALM) profiles remain.
In the meanwhile, tough times stare at all type of NBFCs. Latest results show how Edelweiss Financial Services continued to consolidate its advances with a 5.8% YoY decline in AUM (Assets Under Management) while gross NPAs deteriorated sequentially. Power Finance Corporation (PFC) reported lower-than-expected Q1FY20 PAT due to softer revenue and lower Net Interest Margins (NIMs). Manappuram Finance's asset quality held up well for gold loan business, but the performance of other businesses such as vehicle finance (GNPL or Gross Non Performing Loans at 2.5%) and housing finance (GNPL at 4.6%) had been volatile. Muthoot Finance's other businesses like home finance are scaling up as expected, but the current environment posed challenges.
The wedding season begins from November onwards, while the festive season starts from October and extends till November/December. These are prime months for finance business. On the retail side, there are various types of loans that are sold. EMI-free loans, salary advance loans, credit card loans, personal loans, etc. bring brisk business. Will banks be able to use the festival and marriage season to their advantage? There is a big question mark on that one. The slowing down of retail loans despite the successive cut in repo rate by the RBI belies the theory that cheaper rates boost consumption. Sales slowdown in sectors such as automobiles and real estate hurts further prospects for banks. Some of the banking industry doyens, however, believe this slowdown is temporary in nature. "Evidently, there has been a distinct slowdown in the economy which was reflected in lower GDP growth of 6.8% in FY19. While there has been an across-the-board slowdown in consumption, given the inherent demand and low penetration levels, I do believe this is temporary in nature," HDFC chairman Deepak Parekh said on August 2 in his 42nd AGM.
Like each year, consumer companies are preparing for the festive season. TTK Prestige has introduced 35 new SKUs during the April-June quarter and is understood to have several new product launches in the pipeline for the festive season (Q2/Q3). While high gold prices may act as a deterrent, demand for gold imports may revive closer to the festive and marriage season, says Aditi Nayar, principal economist, ICRA. Consumer durable companies like Voltas are looking to capitalize on the upcoming festive season and ‘second summer’. Investors in apparel firms like Siyaram Silk Mills after grinding through the seasonally weak first-quarter are expecting a pick-up in revenue growth in the forthcoming festive season. If consumers, especially in rural areas, have money in their hands, financial companies will be able to leverage that. "Government so far has also held back on some of many budgetary payments including NREGA wages. Consumption slowdown will reverse with the RBI slashing rates," says Atul Kumar, Head-Equity, Quantum MF. (The author is a journalist with 14 years of experience)