However, Q4 could be challenging for asset quality due to Omicron wave
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Banks are expected to report an uptick in business growth, alongside improvements in collections and asset quality in the December quarter, analysts said. They believe that management commentaries and data on government-guaranteed loans and restructured loans would be the key things to watch out for. That said, the emergence of the new coronavirus variant and an alarming rise in infections could make it difficult for lenders to sustain the momentum in the March quarter.
“We do expect the large banks like HDFC Bank, ICICI Bank, Axis Bank among private banks and State Bank of India among public sector banks to report further improvement in business performance—operationally and outlook on business. However, we should also see an improving performance on asset quality for most mid-tier banks like IndusInd Bank, Yes Bank; small banks like DCB Bank; and most of regional banks and small finance banks," analysts at Kotak Institutional Equities said in a note on 5 January.
The brokerage said it would look at the quarter from three different perspectives: asset quality, loan growth, and net interest margin (NIM). A key factor for improvement in asset quality in the December quarter is the lack of any large corporate loan account turning non-performing. An improvement in collections is also expected to protect asset quality.
“Since June 2021, lenders have witnessed month-on-month improvement and normalization of collection efficiency. By December, in several product segments, collection efficiency was much better than March level and at least similar to pre-covid average, if not better. Recoveries and collections are likely to sustain momentum in Q3FY22 as well," ICICI Securities said in a note on 7 January.
However, it believes that the performance of the Emergency Credit Line Guarantee Scheme (ECLGS) lending pool and restructured portfolio would be key to gauging if it would incrementally add to the credit cost and delinquencies. Interactions with market participants suggested delinquency in ECLGS pool will be similar to normalized slippage levels in the small business segment, ICICI Securities said.
Launched in May 2020, the ECLGS provides 100% guaranteed coverage to select borrowers, and while it was originally devised for small business borrowers with total fund-based credit outstanding of up to ₹25 crore, it now includes other segments as well.
In terms of credit growth, private banks have disclosed in quarterly business updates that their loan book has expanded between 3-8% on a sequential basis. “More so, growth was led by retail and commercial banking. Retail growth has lagged for players having relatively higher share of microfinance or commercial vehicle, and a conservative stance on unsecured personal or business loans," ICICI Securities said.
Experts cautioned that the March quarter would be challenging for asset quality given the ferocity of the third covid-19 wave. It would, they said, test the resilience of borrowers who had availed of earlier rounds of debt recast and were expected to start repayments once the moratoriums came to an end in the next three to six months.
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