'We are currently in a favourable credit cycle'

Summary: India’s banking sector is riding a strong credit cycle, but not all trends are structural. Understanding what is cyclical versus lasting could shape investment decisions ahead.

Summary: India’s banking sector is riding a strong credit cycle, but not all trends are structural. Understanding what is cyclical versus lasting could shape investment decisions ahead. India’s public sector banks are seeing strong credit growth alongside a sharp improvement in asset quality, with non-performing assets at multi-year lows. However, Invesco Mutual Fund’s Hiten Jain believes this improvement is largely cyclical rather than structural, based on historical trends. He also highlights the strength of corporate and banking balance sheets, which have helped limit sharp market corrections and supported ongoing credit expansion. Jain is currently a Fund Manager at the fund house, where he manages six schemes with assets of around Rs 10,800 crore. The Invesco India Financial Services Fund, Invesco India Focused Fund and Invesco India Largecap Fund are all rated four stars by Value Research. Jain has over 17 years of experience across equity and fund management. Previously, he has worked with CRISIL and Dunia Finance LLC, Dubai. Jain holds a BE from Mumbai University, a Global MBA in Finance from S.P. Jain Centre of Management and is a Chartered Financial Analyst. In this interview, Jain also shares his views on deposit trends, risks in unsecured lending, rising competition from NBFCs and the rationale behind his funds’ relatively low exposure to PSU banks. Credit growth has remained strong, but deposit growth has been slower. What resulted in this gap in the first place, and how do you think it will evolve? Deposit growth has been steady, largely in the range of 9-11 per cent, whereas advances growth has been far more volatile. It moved from about 8-9 per cent to nearly 16 per cent, then slowed back to 9 per cent, and more recently has picked up again to around 13-14 per cent. By contrast, deposit growth has remained stable at 10-11 per cent. However, I do agree that deposit growth has not accelerated as much as one would have expected, given that credit growth was running at 15-16 per cent, because, ideally, credit expansion should eventually translate into higher deposits. Part of the explanation lies in the liquidity conditions in the system. If we go back about six quarters, liquidity in the system was deliberately kept quite tight. At that time, the regulator was more focused on managing inflation, while the government maintained fiscal discipline. When both fiscal and monetary authorities operate in a relatively tight mode, system liquidity does not expand easily. As a result, the strong credit growth that we saw earlier eventually slowed down to around 8-9 per cent. More recently, especially after the change in the RBI governor, we have seen a shift in policy stance. The focus has gradually moved from inflation management to supporting growth. This is reflected in measures such as interest rate cuts and reductions in the cash reserve ratio. Additionally, the regulator has been providing more liquidity to banking. Because of this liquidity push, we have recently seen credit growth beginning to accelerate again. If global conditions had remaine