Slowing credit growth due to widespread risk averseness among banks amid a slowing economy dominated the financial sector discourse in the latter part of 2019. There are, however, nascent signs of improvement in health of commercial banks, with improving assets quality and return to profitability after a gap of seven years in the first half of the current financial year.
While credit revival, essential to support growth, will be closely watched, following are five important developments, the outcome of which will shape the banking sector in 2020.
Yes Bank: need for a Fairfax
Private sector lender Yes Bank dominated headlines in the closing months of 2019, albeit for the wrong reasons. The bank is in desperate need of capital to fund its growth and has shortlisted investors, but nothing has been finalised so far. The delay in fundraising led to a rating downgrade. The absence of marquee names among investors has not boosted confidence, since some them will need regulatory clearances as their stake in the lender could go above 5%.
A hitherto sleepy old generation private sector lender CSB Bank — the erstwhile Catholic Syrian Bank — recently had a successful IPO as investors confidence was boosted after billionaire Indo-Canadian billionaire businessman Prem Watsa’s Fairfax picked up a majority stake and infused the much-needed capital. Probably, Yes Bank needs a Fairfax to instil confidence among its stakeholders.
Who will step into Aditya Puri’s shoes
The longest-serving chief of any Indian commercial bank, HDFC Bank managing director Aditya Puri will hang up his boots in October 2020. Mr. Puri was at the helm of affairs from 1994, since the inception of the most valuable Indian lender, which with a deep penetration among retail customers became the largest private sector lender a few years ago In November 2019, HDFC Bank formed a six-member panel to find a successor for Mr. Puri, and the announcement of the new chief could come well before his tenure ends as the bank would like to have a overlap period between the incumbent and successor.
When will interest rate cuts return
After reducing interest rate for five consecutive monetary policy reviews, the Reserve Bank of India took a pause in the December policy review despite falling economic growth. The move surprised the market, but the central bank flagged inflation concerns.
The CPI inflation projection is revised upwards by RBI to 5.1-4.7% for the second half of 2019-20 and 4.0-3.8% for the first half of 2020-21. Inflation over 5% essentially rules out any rate reduction in the first policy of 2020 in February as the RBI targets 4% inflation in the medium term. The recent spike in the headline inflation numbers are due to rise in food inflation, and it is to be seen when the numbers start cooling off to provide some space to the central bank for further easing the monetary policy.
DHFL insolvency
Mortgage lender Dewan Housing Finance Corporation Ltd. is the first financial sector entity (and till now the only one) to be admitted for bankruptcy proceedings after the rules were amended. A timely resolution of DHFL is crucial for the lenders, as it has an exposure of over ₹84,000 crore making it the largest insolvency proceedings ever. Despite a few successes, the bankruptcy proceedings has been long-drawn. Banks would hope the DHFL resolution is achieved within the new 330-day timeline.
PSB mega merger
A mega merger of public sector banks involving folding of 10 banks into four was announced by Finance Minister Nirmala Sitharaman in 2019. The aim was to complete the process by March 31, 2020, so that the merged entities can start operations from the start of the financial year. The Bank of Baroda, Vijaya Bank and Dena Bank merger was completed in about six months. But this time, the scale in much bigger. A smooth merger of these entities is essential so that the credit flow and the other banking operations are not disrupted.
