For an economy to be booming, you need big banks. America has JP Morgan Chase and Bank of America. China has state-owned banks that dwarf most emerging market banks by their balance sheet size. For India’s economy to grow bigger from here on, banks will play a crucial role.
Plotting a comparative chart of the NSE Nifty 50 and Bank Nifty indices for the past 12 months will show a story unfolding. Historically, the Nifty 50 has outperformed the Bank Nifty consistently. Over the past 12 months, things have changed. Banks have led the charge of Nifty’s rally. For the first time in that long, bank stocks have outperformed the Nifty index.
The stock market can sense the change. For years, bellwether stocks were those in manufacturing or technology services. Going forward, the banking sector will likely lead the Nifty and BSE S&P Sensex charge.
The merger of HDFC Bank and HDFC, the most significant home loan company, creates a big bank. However, in India, regarding the balance sheet size, SBI is the only bank that figures among the top 100 banks in the world. India will require banks to prosper to fuel economic growth.
The Reserve Bank of India says many good things in its latest Financial Stability Report. The Indian banking sector has undergone a structural change, resulting in most banks reporting multi-year low non-performing loans. They have capital adequacy and liquidity buffers at the highest level recently. The improvement in bank balance sheets should translate into higher credit growth. The overall non-food credit growth has shown a flat trend every month since October 2022. However, sufficient liquidity in the banking system is good news for the corporate sector. The overall credit in the banking system stands at Rs 135 lakh crore as of March 2023. It was Rs 53 lakh crore ten years ago. The extensive corporate borrowing was almost a third of the total lending ten years ago. It has now dropped to 20% of the total outstanding credit. The consumer loan segment, on the other hand, has moved up to 35% from 18% ten years ago, the report highlights.
India’s economy is a consumption-led economy. Easy access to bank credit will continue to drive consumer loans and make fat profits for banks as retail loans have higher margins. The large corporate loan book also needs to grow for the economy. With the increased capital expenditure by the government and incentives to the manufacturing sector, there is a good chance for the large corporate loan book to show growth. Banks can expand their loan book quickly with adequate capital for provisioning against non-performing loans and more money to lend. You may want to choose a basket of banking and finance-related companies to add that punch to your portfolio.
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