Investors of lending companies were bracing themselves for disappointing earnings during the first quarter of this financial year. With the average daily COVID-positive cases reaching almost around four lakh and localised lockdowns being imposed in various parts of the country, the economic impact of these factors was anticipated to start reflecting in the quarterly results of various banks and NBFCs.
However, much to everyone's surprise, the results of lending institutions revealed that there was no significant fall in the demand for loans, even during an extremely difficult quarter. Leading banks such as ICICI, Axis, HDFC Bank and Kotak Mahindra reported positive growth in their credit books. Credit growth, coupled with lower provisioning, resulted in a strong jump in profits. But it is important to note that the growth was on a YoY basis and that the credit growth of the first quarter of the previous year was very low, owing to a stringent COVID lockdown. Banks' profits also looked optically elevated, as they did not have to make a high amount of provisions as they did last year.
Although the size of banks' loan books generally stayed flat or contracted marginally on a sequential basis, this itself was a positive surprise, given the very challenging operating environment. The upshot was that deposits in current accounts and savings accounts (known as CASA deposits) at these banks witnessed a strong surge. Since these were low-cost deposits, it lowered banks' interest expenses and thereby, boosting profitability.
For other players such as NBFCs, this quarter played out differently, as the quality of assets became a major concern. Although it is expected to improve going forward, the fall in collection efficiency especially for lenders who rely on physical collection (including micro-finance institutions and small-finance banks) will cause pain to their investors in the future.