What Next for Banks

Ten years ago, we had the monumental problem of non-performing assets in banks. We also had then the twin balance sheet issues; holes in both banks & corporate balance sheets.

Then came the far reaching policy measures; (i) A new bankruptcy law in 2016 (ii) bank mergers between 2017 & 2019 the Govt. Bank merged some 15 banks (iii) huge amount of capital was pumped into the state run banks to strengthen them. Rules were amended to allow DBS, a Singaporean Bank, to acquire an old private bank in 2020, first time this happened in Indian banking. All these measures and improvement in the ecosystem have brough about visible changes in the banking space.

While the banks have made a record profit in FY 2023-24, some INR 3 Trillion, the gross NPA ratio of scheduled commercial banks stood at 3.2 percent as on Sept 2023 and its likely to remain below 3 percent as on Mar’ 24.

Recently S&P Global ratings revised their rating outlooks on six Indian Banks; including 02 Public Sector Banks (PSBs) from “stable” to “positive”. The six banks are Axis Bank, ICICI Bank, State Bank of India (SBI), HDFC Bank, Kotak Mahindra Bank and Indian Bank. The rating agency said in a statement that India’s Banking system continues to ride the good economic growth momentum, well supported by recent structural improvements in the system. The S & P expects banking sector’s weak loans will decline to about 3.0 percent of gross loan by Mar’25. This is on the back of healthy corporate balance sheets, tighter underwriting standards and improved risk-management practices. The rating agencies, however, has a word of caution for rapid growth in unsecured personal loans portfolio of banks which could contribute to incremental non-performing loans.

Similarly, foreign brokerages firm CLSA says Indian Banks have established themselves on a much stronger footings led by cleaner balance sheets, record profits and inexpensive valuations. The CLSA report says “we believe Indian Banks are well placed after a roller coaster decade. Balance sheets are the strongest. They have been over a decade and profits have rebounded sharply (quadrupling in 10 years)”. The report further highlights the return on equity (ROE) of the Indian Banking sector at 15% is the highest since 2010-11. The net NPA/net worth ratio of the banking sector has declined to a decade low; driven by better asset quality, stronger provision buffers on an improved capital position.

Sounds Brilliant! But there are challenges woods are lovely dark and deep and there are challenges & there are promises to be kept.

BANK FRAUDS –

Fraud cases in Indian Bank surged to 36.075 in FY 24 from 9.046 in FY 2022, up by nearly 300 percent. However, the amount involved has fallen from INR 45,358 Cr. in FY 22 to INR 13,930 Cr. in FY24 as stated by Central Bank in its annual report. As regards number of cases while private banks reported the maximum number of frauds the PSBs contributed the maximum amount. Further, in terms of number of frauds occurred its predominantly on the digital payments platforms (card payment & internet). Although value wise it’s the loan portfolio which is the main source.

In other words everyday some thousand cases of frauds are taking place in the country which by any standard is quite high. While we are moving fast on the digital payment platforms and quite rightly so there is a need to come out with fraud proof transfers & payments. We need to spend heavily on technology & on training of manpower. We also need to educate the customers in an ongoing basis and in a mission mode.

AI -

While in the late 1990s & early 2000s decades were watershed in banking industry in as much as the entire banking industry; both public & private banks, underwent a transformation and core banking solution became the new normal. Now after some 25 years it is artificial intelligence (AI) which provides both opportunities & challenges in the banking space. The opacity of AI & ML (Machine Learning) algorithms can pose challenges, especially in financial decision making. There is a strong need for banks to ensure that AI models are transparent, understandable and can be scrutinised for biases & errors.

The Public Private Participation:

There is a radical shift in to banking space during the last 03 decades. Prior to liberalisation the public sector banks used to occupy 90 percent banking space. During the last thirty years or so although the PSBs continue to have their dominance in terms of branch network when it comes to business, they have lost about 30 percent of the business share in as many years. The cake being the same with the coming in of the new generation private banks this was bound to happen. While public & private banks have co-existed and are growing there is a need for the PSBs to improve their performance further to maintain their share. The Private sector Banks (PVBs) must reach out to country sides and open their shops in rural areas also to assist PSBs in serving the 6 lakh odd villages where 65 percent people of India live. It is heartening to observe that during Mar’20 to Mar’23 the PVBs have opened 569 new branches in villages as against 151 by the PSBs.

Although the service conditions have improved in the recent past with higher wages and training facilities there are issues which need to be addressed in a focussed way. Increasing number of ladies employees are joining the industry in both PSBs & PVBs. This is a good sign and goes a long way in bringing about gender equality. But their movements on promotion/rotation are posing new challenges to the management. The training system is not uniform in the banking system. The better grooming system in SBI can be adopted by all others.

The Resource Crunch –

Bank deposits have grown by 10.99 percent and 11.46 percent in 2022-23 and 2023-24 respectively.

The CASA component have grown by 5.60 percent and 9.89 percent during the same period. In order to have a reasonable double digit credit growth the banks’ resource must grow by 15 to 17 percent.

The MF industry continues to do exceedingly well and has grown at over 37 percent during 2023-24. The AAUM (Average Assets under management) has reached nearly INR 59 trillion which is 90 percent of total saving deposit of all scheduled commercial banks in the country. While it is all set to overtake the saving portfolio during 2024-25 it may overtake entire CASA portfolio in the following year.

May be banks will have to explore new avenues to get float. Maybe they should have their own MF subsidiary, SBI at over INR 10 trillion AAUM is the biggest MF house in the country. They should also open demat account and trading platforms to have floats and earn non-interest income.

During over 250 years of banking history Indian Banks have weathered many storms. With improved asset qualities, better profitability and a strong recovery law banks will not disappoint their stakeholders and continue to contribute creditably towards the growth of the nation.