The ‘achchhe din’for banks will hinge on a good monsoon

Credit rating agency Icra has revised downwards its outlook for the Indian banking sector to 'stable' from 'positive' on expectations of moderation in credit growth and profitability. However, the endeavour of the banking sector to regain its position will be dependent on several factors with the most crucial one being a good monsoon in the current year.On the asset quality front, a further moderation in the gross nonperforming assets ratio for the banking system at 2.2 per cent by March 2025 from three per cent likely in March 2024 is expected.If this happens, then this will be the lowest level since September 2011.However, challenges on deposit mobilisation will continue in FY25 and banks will have to hike deposit rates to attract the funds, the agency reasons, adding that the credit deposit ratio, which has reportedly come under the regulatory gaze lately, will continue to be elevated at over 80 per cent.These assumptions will all depend on a good monsoon, which will also mean fast circulation of money, leading to the country’s growth. CASA’s share is also likely to moderate with customers of the higher-yielding term deposits continuing to be the flavour of the season.

The only concern is that this will put pressure on the net interest margins (NIMs) for banks, which already have been under pressure for the last couple of years and will further moderate in FY25. The good thing is that the state-run lenders have come out better on fresh slippage accretion compared to private sector banks, which are otherwise considered more lean and diligent.The gross fresh NPA generation at state-owned banks is expected to come at 1.3 per cent in FY24 and go up to 1.5 per cent in FY25, while the same at private sector banks is estimated at two per cent and 2.2 per cent, respectively.The proportion of unsecured loans is still very low in the overall advances mix and any increase in stress from such advances will not cause any serious issues.Meanwhile, the Indian Meteorological Department (IMD) is poised to unveil its much-anticipated long range forecast for the monsoon season.

Again, this year's monsoon could potentially arrive earlier than usual, driven by the simultaneous activation of the Indian Ocean Dipole and La Nina conditions. These concurrent events are laying the groundwork for a robust monsoon with potentially high volumes of rainfall across several parts of the country.However, climate change has been playing spoilsport everywhere, often belying forecasts of the Met department. So, at the moment we only need to wait for the forthcoming monsoon. Simultaneous existence of events like IOD phase over the Equatorial Indian Ocean coinciding with the formation of La Nina in the Pacific, against the backdrop of the monsoon, indicates that these factors might augment peak monsoon conditions typically experienced from July to September. The enhanced predictive capabilities will enable countries like India to better prepare and respond to shifting climate patterns.