India’s banking system on the verge of recovery

In calendar year 2021, Bank Nifty posted a relative underperformance against the broader market. The banking system underwent various reforms during the year, such as the creation of failing banks to address non-performing asset issues, harmonization of banks’ corporate structure and alignment of risk parameters for large NBFCs, among others.

We expect the sector to perform better in CY22 than at the start of the first half of FY22. and challenging the supply chain. Similar to previous economic trends, investment credit offers are increasing as the real economy begins to grow with increased capacity. Key sectors such as textiles, iron and steel are already seeing green shoots of recovery.

Banks have improved their asset quality over the past year. The quality of restructuring remains reasonable with the small share of large corporate exposures and a higher share of low LGD mortgages and SMEs. While MSME stress has been largely addressed by the ECLGS, we expect better visibility from H1CY22. Despite the uncertainties induced by the Omicron variant, slippages have decreased, suggesting manageable Covid-19 stress.

Stress persists in some pockets such as MFIs and VCs, but is unlikely to spread as the economy recovers. The PCR remains strong with healthy contingent provisions. Therefore, credit costs are likely to be moderate across all banks, which in turn improves their ROA.

As concerns over the new variant of Covid-19 continue to loom, the country’s health infrastructure appears to be well prepared with adequate capacity to deal with any emergency. Another major concern is rising inflation.

However, the RBI continues to prioritize economic growth over inflation and has adopted a “Wait and Watch” policy. While he is unwilling to disrupt the nascent recovery in growth, interest rate hikes are likely on expectations of persistent inflation, supportive growth and Federal Reserve tightening.

The rapid adaptability of the banking sector, combined with the power of technology and timely government action, has laid the foundation for improved credit growth in the year ahead. Government fiscal spending and the RBI providing liquidity continue to sustain consumer and business sentiment. Moreover, the level of social and consumer activities after the easing of the lockdown was much higher than expected, which further supported credit growth.

The “new normal” is evolving and is at the heart of the positive economic outlook and consists of the establishment of a data-driven, decentralized and flexible economic paradigm. Accelerated adoption of technology across all industries and businesses has become a necessity. The “new normal” keeps investors’ hopes alive.

In conclusion, the banking system is on the verge of recovery, with asset quality issues taken care of and investments ready to start. 2022 should be the year likely to provide a snapshot of the economy coming out of the Covid Impact. The banking sector continues to have enormous leeway to contribute to the country’s journey to grow its economy from $3 trillion to $5 trillion.

(The author, Siji Philip, is Senior Research Analyst, Axis Securities. Opinions are personal)

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