INDIAN BANKS STRONG ENOUGH FOR SHAREHOLDERS & FOR GDP GROWTH

 

The Indian banking sectors is very strongly positioned to reap the gains of the Indian economic growth for the next 2 to 4 years.  The biggest contributors to the Nifty will bring significant revenue, profitability and growth from the inclusiveness of the Indian economy.  We have split the contribution into verticals one through internal improvisation numbers and rationales behind the sector and 2ndly through the digital medium. The large NBFC market is also going to be a key contributor to the sector.  The margin of safety for the Banking industry has changed dramatically giving one of the strongest positions to the industry. The revolution in business process and current strong position followed with the strong recovery through NCLT makes the sector one of the strongest banking sector across the globe.

If we recapitulate we find that the twin balance sheet” problem, high leverage at firms and high non-performing assets (NPAs) at banks both have been brought down from the leveraged position. The biggest gift to the Banking Industry is by the corporate being able to service the debt. This debt serviceability is a major factor for the sector to grow and keep NPA levels at a low level since NCLT is acting as a guard to the taxpayer’s money. As per RBI Indian banks, today boast of capital adequacy of

15.9 per cent on the average, although the average at public sector banks is lower at 13.5 per cent. (The minimum requirement is 10.875 per cent and is poised to rise to 11.5 per cent in October).

 NPAs at banks were 6.8 per cent of advances in December 2020, way below the peak of 11.2 per cent in 2017-18. This level of improvisation reflects the sector's contribution to the returns to the equity shareholders and also towards the economy.  The banking industry CASA ratio speaks enough for the Industry’s current strength.

 At the same time rural economic growth followed by a slowdown in consumption is going to spook the demand for capital for the MSME sector. Large companies are well placed with liquidity and bringing down the debt levels have been much easier in  this pandemic as unnecessary cost was eliminated hence servicing the debts and bringing down the debt levels have been a very powerful act by the corporate.

  If we want to identify the areas of banking credit growth then we need highlight on the credit degrowth industries from where the new credit demands will arise:

Petroleum, coal products and nuclear fuels de-grew 4.6% YoY (lowest YoY growth in 15 months).

Certain sectors such as metals (-6.2% YoY), construction (-1.7% YoY), all engineering including electronics (-6.3% YoY) saw persistent YoY de-growth.

 Chemicals and chemical products (overall) continued to de-grow at 7.9% YoY (however, it was up 4.3% MoM).

  Infrastructure grew at 3.6% YoY, after consistently reporting negative growth (de-growth) since Oct-20.

 This trend was led by growth in credit for roads (34.4% YoY/17.9% MoM). Credit to the telecom segment witnessed a 25.7% MoM (4.6% in Feb) growth. However, this segment witnessed -21.3% YoY growth (-36.3% in Feb).

 Now let’s comes to the Digital avenue source for the Industry to grow.  The fintech industry has been growing stupendously.   The same growth will now be captured by the banks since fin-techs are now the target of banks. Banks are expanding their business capabilities through collaborating with fintech and reducing their operating cost and enhancing the business reach. Banks are using fintech arms of AI, ML, SaaS and converting the banking platforms as PaaS (Platform as service). Banks internal source for creating and using such fintech platforms is a cumbersome and timing consuming affair.  The best way is to buy out fintech platforms and make the revolution for the banking industry.

The the banking industry will use these plug and play fintech platforms to grow their business and create new servicing strategies.  The API integration mechanism helps banks to create new markets and reach new customers. Understanding and growing the intrinsic value of the customer is the key for any industry to grow. Now fintech platforms and the tools of AI,ML, SaaS helps to understand the abilities of the customer and take the products and service accordingly.

 For example the ‘buy now and pay later model is going to play stupendous growth for the consumption industry for the unbanked and underserved population of India not covered previously by banks and NBFC. The whole consumption market will be changed felicitated by the Banks and Fintech collaborative practices and strategies.

  The model in the play between banking and fin-techs is that the model that is prevalent is the risk-backed model. Banks are willing to take 100 per cent exposure on their balance sheet. They do it because of the risk of comfort from the partnership. Under the agreement, Fintech bears the first 10 per cent of the loss, or if the loans go bad beyond a specific time, it buys it from the bank.

 Personal loans on Google Pay which includes banks like HDFC Bank, ICICI Bank and Kotak Mahindra Bank.  This model is now going to spread like wildfire in other fintech too. Hence the lending and payment industry is going to bring a revolution for the banking business to use big data.

  The collaboration between banks and fin-techs will play a big role in the Indian financial market and GDP growth. The current banking stress is under very much control and an immediate spike does not seem to be under the radar as long as NCLT keeps in action mode.  The Banking industry is poised to create significant growth for market and equity shareholders.