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Rising interest rates in the June quarter following rate hikes by the Reserve Bank of India (RBI), coupled with a rise in demand for credit, helped banks report a robust 14.6% growth in net interest income, almost twice what they recorded last year.

A report by economist Dipanwita Mazumdar of Bank of Baroda analysed the financial performance of 35 banks, comprising 12 public sector, 19 private sector and four small finance banks. It looked at key indicators of profitability, margins and efficiency ratios for the consolidated groups. For public sector and private banks, net interest income -- the difference between interest earned and expended -- rose sharply by 11.9% and 17.2%, respectively, in Q1 FY23 from 5.4% and 10.5% in Q1FY22.

Robust growth
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Robust growth

The weighted average lending rate on fresh bank loans increased 31 basis points (bps) between March and June to 7.94%, RBI data showed. On existing loans, it rose a tad slower, by 19 bps, to 8.93%. The monetary policy committee (MPC) of RBI has raised the repo rate by 140 bps in three tranches between May and August. In the three months through June, the effective rate hike was 90 bps. But bankers do not anticipate a dip in credit demand in spite of higher interest rates.

“Irrespective of the interest rate hike, which has been talked about, now the retail engine continues to adhere to its promise and we hope that we will have a decent growth in retail going forward as well. Rather, when it comes to corporate growth, we are quite hopeful this year we will have better traction," Dinesh Khara, chairman, SBI, told analysts on 6 August.

Despite the gradual resurgence of corporate credit where a large portion of sanctioned loans are yet to be utilized, it is the retail segment that drove credit growth in the June quarter. Analysts at Kotak Institutional Equities pointed out in a report on 16 August that corporate loans have not picked up meaningfully yet, growing just 3% in June 2022. “Some lenders are indicating caution due to worries relating to the global macroeconomic environment. But, incrementally, banks saw better growth opportunities in sectors like non-bank lenders and infrastructure (roads and telecom)," the report said, adding that banks have been indicating higher utilization of working capital limits by borrowers in the past few quarters.

The report said that large private sector banks have outperformed smaller and mid-tier banks, which have struggled due to exposure toward covid-impacted sectors such as commercial vehicles, microfinance, small businesses, and self-employed retail. However, mid-tier banks are also now indicating a strong outlook for credit growth as most asset-quality challenges have been addressed, capital levels are healthy and credit underwriting has been tested, it said.

Analysts at Emkay Global Financial Services Ltd said that most banks have raised their growth guidance for FY23, factoring strong June quarter and improving growth impulses in retail, small businesses, and corporate portfolios. “Within retail, mortgage growth remains healthy, while signs of pick-up are visible in otherwise lacklustre vehicle finance as well. Unsecured loan growth remains strong, led by cards and personal loans, given underlying strong demand and banks turning pro-risk," it said in a note on 11 August.

That said, funding as well as operational cost pressures are rising and, thus, banks with the ability to pass on rate hikes floating rate book and drive-up fees should be able to protect their core profitability, it said. Emkay sees ICICI Bank and SBI as far better placed with a higher share of the retail book, including mortgages to improve their margins, while SBI could additionally benefit from retirement liability due to the absence of family pension provisions unlike last year.

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