RBI, SBI say banking sector will continue to improve in 2023 and lenders should raise deposit rates

State Bank of India (SBI) chairman Dinesh Kumar Khara, in an interaction with CNBC-TV18, said there was an improvement in the bank's book in 2022 and the same shall continue in 2023. He believes that improvement has come on the back of economic growth. The Reserve Bank of India (RBI) also said that the health of the banking system in India had shown steady improvement in its latest report on banking sector trends.

"From capital adequacy ratio to profitability metrics to bad loans, on each of these indicators, public and private sector banks have shown visible improvement. As credit growth also witnessed an acceleration in 2021-22, banks have seen an expansion in their balance sheet at a pace that is a multi-year high," RBI said.

The RBI has raised rates aggressively this year to tame inflation. While banks have swiftly transmitted the hikes to their lending rates, deposit rates have been laggards for most.

According to Khara, there has been a scramble for deposits, and "deposit rates should be in sync with RBI's repo rate". RBI also believes that India's banking sector remained resilient in 2021-22, and lenders may have to raise deposit rates more to meet a surge in credit demand.

"During 2021-22, as credit growth picked up and deposit growth moderated, the incremental credit-deposit (C-D) ratio reached a four-year high," the RBI said in its report on Trends and Progress of Banking released on Tuesday.

RBI has hiked the repo rate by 225 bps in the past five policies. The first hike was to the tune of 40 bps in May and then 50 basis points in June. It raised the repo rate by 50 bps in August and then by 50 bps in September. Considering the recent hike of 35 bps this month, the total rise comes to 225 bps.

On loan growth, Khara told CNBC-TV18 that it would fall a bit to 15-17 percent levels. However, he doesn't expect interest rates to impact loan growth.

Loans of Indian banks rose 17.5 percent in the two weeks to December 2 from a year earlier, while deposits rose 9.9 percent, the latest data from the RBI showed earlier in the month. The consolidated balance sheet of Indian banks notched double-digit growth in 2021/22 after a gap of seven years, with credit growth accelerating to a 10-year high at the end of the first half of FY23, the report added.

Khara believes that there will be an improvement in asset quality. However, recoveries may not be high in terms of quantum.

Indian banks have reported an improvement in performance and a decline in bad loans following the COVID-19 pandemic. Now that the economy is recovering, credit offtake has improved significantly.

To fund this credit growth, banks have been mobilising deposits faster amid tight banking system liquidity in recent weeks. In terms of asset quality, the gross non-performing assets (NPA) ratio of banks has been declining sequentially to reach 5 percent in end-September 2022, according to the report.

This decrease, the report said, was led by lower slippages as well as a reduction in outstanding bad loans through recoveries, upgrades and write-offs. However, the number of fraud cases reported by private banks outnumbered those by state-run peers for the second consecutive year in 2021-22, according to the report.

In terms of the amount involved, however, the share of state-run banks was 66.7 percent in 2021-22, compared with 59.4 percent in the previous year. The RBI said it was imperative that banks ensure due diligence and robust credit appraisal to limit credit risk. It also warned that slippages in restructured assets need to be monitored closely.