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The asset quality of the Indian banking system is set to improve further with its gross non-performing assets (NPAs) estimated to decline to 5.6-5.7 per cent by March 2023 from 6.2-6.3 per cent in March 2022, according to ICRA.

The NPAs will decline to 1.7-1.8 per cent by end of the current financial year (FY23) as against an estimate of 2 per cent by March 2022.

However, the rating agency added a caveat saying the performance of restructured loan book poses uncertainty to asset quality. The Russia-Ukraine conflict poses macro-economic challenges related to cost inflation, higher interest rates, and exchange rate volatility, which could pressurise asset quality, it added.

The credit and other provisions are estimated to dip to 1.3-1.4 per cent of advances in FY23 as against an estimated 1.7-1.8 per cent in FY22, said Anil Gupta, vice president, ICRA.

ICRA expects the outlook for banks to be ‘stable’ in FY23, based on continued improvement in earnings driven by improved credit growth of 8.9-10.2 per cent in FY23 (8.3 per cent for FY22 & 5.5 per cent in FY21) and a decline in credit provisions.

Banking credit growth would come from the non-food segment which continues to be driven by retail and MSME segments, and partially by co-lending arrangements with non-banking finance companies (NBFCs).

The pace of deposit mobilisation is expected to slow down to 7.3-7.9 per cent in FY2023 (8.3 per cent in FY22e & 11.4 per cent in FY21).

Domestic passenger vehicle retail sales in March declined by 4.87 per cent to 2,71,358 units, as compared to the same month last year, automobile dealers' body FADA said on Tuesday. According to the Federation of Automobile Dealers Associations (FADA), PV sales stood at 2,85,240 units in March 2021.

"Passenger vehicles continue to see high demand and long waiting periods as semiconductor availability still remains a challenge, even though supplies slightly improved from previous month," FADA President Vinkesh Gulati noted. The Russia-Ukraine war and China lockdown will further dent supplies and will hit vehicle deliveries, he added.

Two-wheeler sales declined by 4.02 per cent to 11,57,681 units last month, as compared to 12,06,191 units in the year-ago period. "The two-wheeler segment was already a non performer due to rural distress. It saw further dampening due to rise in vehicle ownership cost coupled with rising fuel cost," Gulati stated.

Commercial vehicle sales were up 14.91 per cent to 77,938 units, as compared to 67,828 units in March last year. Three-wheeler sales were also up 26.61 per cent to 48,284 units last month, as compared to 38,135 units in March 2021.

The effect of the HDFC-HDFC Bank merger will be for the bigger space of the Indian financial sector and not just limited to the banking sector. The large finance companies have practically no benefit of regulatory arbitrage. Earlier, such arbitrage between banks and NBFCs was normal.

The logic of the merger is very clear — the cost of borrowing of banks is lower. The finance companies, including housing finance entities, have to rely on wholesale fund-raising from the market or borrowings from banks, both of which are relatively costly. Above a certain size, it becomes difficult to rely solely on the wholesale funding or bank borrowings.

Gradually, it may so happen that the large finance firms may eventually get converted into banks. This would be subject to Reserve Bank of India’s comfort and guidelines because shareholding of many big NBFCs is with large corporations.

The market views that there will be good cost savings and efficiency for the merged entity, especially on the infrastructure side, after witnessing the way share prices of HDFC and HDFC Bank behaved today. I do not see any regulatory issues cropping up for the merger. If there were such concerns, they would not have done it.

Another aspect about the consolidation which we have always been talking about is the need for a few large banks. The HDFC-HDFC Bank merger may trigger further consolidation in the banking sector as some banks may look for scale. In the public sector banking space, I do not think any further mergers can happen. In the private sector, I do not rule out the possibility of such activity. Maybe we are moving towards consolidation in the private sector for scale.

There is a need for India to have fewer large-size institutions, which can be counted amongst global banks. HDFC Bank is already the largest in terms of market capitalization and after the merger, it may be amongst top five-six banks globally. The merger action augments the ability to take big ticket loans and comes at a time when the capital investment is picking up.

There could be niche players supported by a digital backbone. Universal banks like HDFC operate on scale and even the digital platform requires huge investment now. The technology spend for the banks is going up and you need money.

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