How much of a worry is the flattening, or perhaps in some cases the declining deposit growth, what are the reasons that you would attribute it to and do you see the pace of deposit growth that we are seeing right now actually sustain, where do you stand on it?
Firstly on the NPA front, I believe that the NPAs will further go down. In the COVID period, that is the entire last two years, we have seen most of the banks been able to manage their NPA quite exceptionally well. In fact, the system-wide NPAs would have come down in this two-year period by something like 60 bps or 70 odd bps and most of these banks also carry excess provisions which they had provided for when the COVID had hit. So, as they give up their excess provisions that they have made, the NPAs will continue to improve further so that is one part.
On the deposit front, there is indeed a worry that the deposit growth generally has been very weak for most of the banks and perhaps that has been attributable to the fact that we had hit very low interest rates during the COVID period which was born out of the RBI sharply cutting interest rates. In fact, globally we have seen interest rates been cut sharply. Now is the time when the interest rates are now gradually catching up. RBI has over the period of time raised the interest rates and we are perhaps towards the end of the rate hike cycle but the deposit rates have not yet caught up and that is one reason why we find the deposit growth rate has been very slow.
I believe that as we go forward, as tech starts getting used more and more, you will find most of the banks getting into the fintech space. Using digitisation of the banking space in general should spur deposit growth in times to come.
Again, as far as economic prospects for India are concerned, do you see them hit by this kind of mismatch, the slow pace of deposit growth, do you think that could hold back credit growth?
Yes I think what we need to focus on is not the push factor from the banks that will drive the credit growth, it is rather the pull factor from the economy which will drive the credit growth. And there there are hiccups.
You see from the pull point of view the largest consumption of credit growth now has been on the personal loan fronts, particularly more on the housing loan side. We have not seen the corporates pick up credit so much. You talked about the PLI scheme, but then manufacturing as a sector which is part of the economy has shrunk in terms of its share or proportion and that PLI scheme is badly needed to spur that growth in manufacturing sector which will pull in the credit from the banks.
So credit growth is not merely a push factor, it has a lot to do with the pull factor because right now the banks are in a proper shape or in a better shape in terms of their asset quality so their ability to price the loans finer is far greater now relative to what they had a few years ago. But that said, the pull factor is still missing and one of the pull factors needed badly is that the manufacturing sector has to grow rapidly and that seems something of a mountain to climb.
So keeping all these factors in mind — deposit growth, credit growth, looking at the NPA picture, where do you think the Bank Nifty is headed from this point onwards? If you can, which of them as far as the counters are concerned which ones you think would lead from the front and which ones could be the laggards?
Banks have or the Bank Nifty has outperformed the underlying Nifty quite sharply and that has got to do with the fact that over the last two years the ROA expansion for most banks has been quite spectacular. I think most of the banks have expanded their ROA anywhere between 30-40 bps. Now that kind of expansion obviously has led to not only the multiple rise that is the price to book multiple that we look for in banks but it has also been aided by the sharp growth in profit.
The profit growth for most of the top tier banks has been 60% plus on a CAGR basis for the last two odd years. Some banks have grown even beyond that number. So combination of a profit growth, combination of an ROA expansion leading to the multiple expansion has led to great times for the Bank Nifty in terms of an expansion. But somewhere I believe that now that expansion phase at least on the price to book value has ended but the profit growth will henceforth still continue probably for a six-month period, nine-month period before eventually we will find that investors start looking at other sectors beyond the banking sector. So Bank Nifty still has steam left for it to expand but probably that steam will last six months to nine months.