Unified Payments Interface (UPI) transactions saw a significant increase of 57 percent year-on-year (YoY) in FY24. PhonePe and Google Pay were the leading players in this space, together accounting for an impressive 86 percent of the market share, as reported by the Boston Consulting Group (BCG) in their Banking sector roundup for FY24.
Shifts in Digital Payment Trends
There has been a notable shift in digital payment methods. Credit card transactions have doubled over the past three years, contrasting with a 43 percent YoY decline in debit card transactions.
Banking Sector Performance
The Indian banking system exhibited strong credit growth, rising by 15 percent, accompanied by a 13 percent growth in deposits in FY24. For the first time, the total net profit of the banking sector surpassed ₹3 lakh crore, with all bank groups achieving a return on assets (ROA) exceeding 1 percent. This reflects the sector’s profitability, driven by high credit growth, robust fee income, and low credit costs.
Profitability Trends
Private banks reported a 25 percent YoY increase in profits, whereas public sector banks (PSBs) experienced a 34 percent rise in net profit. This indicates a positive trend in profitability across the banking sector.
Asset Quality Improvement
The asset quality of banks improved significantly, with gross non-performing assets (GNPAs) falling to a decade-low of 2.8 percent. This improvement is bolstered by a strong provision coverage ratio (PCR), suggesting that banks are well-equipped to handle asset-side risks. PSBs reduced their GNPAs to 3.5 percent, while private banks reported GNPAs below the industry average at 1.7 percent.
Economic Growth and Sovereign Rating
India’s economic growth for FY24 exceeded all projections, achieving an 8.2 percent YoY increase. The forecast for FY25 is between 6.2 percent and 7 percent YoY. This robust economic performance led S&P Global Ratings to upgrade India’s sovereign rating outlook from stable to positive, citing improved growth and enhanced quality of government expenditure.
Cost-to-Income Ratio Trends
Despite the favorable financial performance, the sector’s cost-to-income ratio (CIR) deteriorated by 206 basis points (bps) to 49.6 percent. PSBs reported a CIR of 52 percent, up from 50 percent in FY23, while private banks saw a slight increase to 47 percent from 46 percent in FY23.
Provisioning Trends
Provisioning trends varied, with PSBs experiencing a 37 percent decrease, whereas private banks saw increases in provisioning, notably HDFC Bank (71 percent) and Kotak Mahindra Bank (244 percent).
Capitalization and Market Valuation
The banking sector remains well-capitalized, with 33 out of 35 banks maintaining a capital to risk-weighted assets ratio (CRAR) above 15 percent, exceeding the regulatory requirement of 9 percent. Additionally, PSU banks have outperformed private banks and non-banking financial companies (NBFCs) in market valuation growth over the past three years.
