It’s Advantage India, Thanks to its Banking Sector 

India’s banking sector has performed remarkably well on two important counts – it has been able to reduce its NPAs and secondly,the credit growth has been strong

Central Reserve Bank Gold Loan and Banking Policy

India’s economic fundamentals remain strong and it is likely that the country will emerge stronger despite ongoing economic and geo-political challenges in the form of high inflation, recessionary fears and the Russia-Ukraine war, among others. These phenomena have only added fuel to the fire. It is expected that banks will play a leading role in shaping the economy. 

One of the tell-tale signs to assess the economic situation is to look at the performance of the banking sector. India’s banking sector, especially the private banks, has performed remarkably well on two important counts – first, the sector has been able to reduce its Non-Performing Assets (NPAs) and secondly, the credit growth has also been good.

Non-performing Assets

Banks have been able to reduce their Gross non-performing assets (GNPAs) remarkably over the past two years. As of March 2022, GNPAs have dropped below 6 per cent and are lowest since 2016. Meanwhile, net NPAs fell to 1.7 per cent during the same period.

This is an indication that even during the turmoil of the Covid-19 pandemic, bad loans of banks did not spiral, contrary to the fears of many experts. Banks were prepared for tough times and even made higher provisioning including provisions for restructured accounts.

The asset quality of banks has improved from the pre-pandemic levels and new slippages have been largely in control, the RBI has said. 

The RBI has been encouraging banks and other financial institutions to proactively undertake stress testing of their loan books subjecting them to various levels of stress, including extreme scenarios to estimate the loss absorption limits. This has helped banks deal with the situation in a more proactive way.

Banks are also now better prepared to deal with shocks with comfortable capital positions and without compromising support to the overall economy. They are better prepared to meet credit demand.

The bad loan situation started aggravating almost a decade back. According to a media report quoting an RBI data, Gross NPAs as a percentage of gross advances stood at 2.40 per cent, which peaked to 11.50 per cent in 2018. Since then it has been a downhill and the gross NPAs stood at 5.97 per cent as of March 2022. 

Credit Growth

There has been a 13.1 per cent year-on-year (YoY) growth in the bank credit in the fortnight ended June 3 which is the highest overthe last three years. Growth in the bank credit during the corresponding period in the previous year was at 5.7 per cent according to a data released by the RBI.

Credit growth is only slightly lower than the growth witnessed in pre-pandemic times when it was at 14.19 per cent in April 2019, the RBI data said.

Banks extended incremental credit of Rs 1.02 trillion during the said fortnight period, taking the outstanding loans to Rs 121.40 trillion. 

This is significantly important considering that it was at the back of repo rate hike undertaken by the central bank in its unscheduled monetary policy meeting, in May. There were fears of bank lending getting hit as a result of this action. 

A Business Standard report gives a deeper insight of the situation. The credit growth has doubled to over 12 per cent YoY as of May 20, up from 6 per cent recorded in the year-ago period, this report said.

While banks have been in the thick of action, non-banking financial institutions (NBFCs) have also joined the bandwagon. Credit from them have picked up significantly compared to the situation during last year.

The spike in credit growth is attributed to the demand coming from the industry. Working capital requirements of companies are now normalising, after getting severely hit since the start of the pandemic, this report said quoting India Ratings. Credit utilisatisaion has also improved. 

Credit Growth Outlook

There is a governmental focus on making India a global manufacturing hub and India is being seen a strong alternative to China in this respect. India has a lot of ground to cover, but a beginning has been made. The government has introduced Production Linked Incentive (PLI) schemes which may prove to be a game changer for domestic manufacturing.

The companies would require capital to set up new plants or expand existing capacities and this would further give a push to credit intake.    

But, inflationary fears have also made investors wary of their investments. We are seeing a situation where money is shifting to the developed markets from the emerging markets. Moreover, taking loans from overseas has become expensive because central banks across the world are going for interest rate increases and also weakness in INR against the US Dollar is a hurdle.

While this is no great news, as raising funds from the market or overseas banks will become difficult, banks in India may benefit. The companies would prefer borrowing from banks, back home, rather than take costly loans from overseas.

A low interest rate regime, till now, has acted as a strong fillip and persuaded people to take advantage of the situation in the retail loan segment. We have seen how residential real estate demand has picked up over the last two years. People have not only shown keenness in owning their own homes but also upgrading to bigger ones or refurbishing them. 

Automobile companies have also seen record sales in semi luxury and luxury car segments. The demand for personal loans also picked up. 

Headwinds

The RBI has increased repo rate by 90 basis points or bps in the last two months. With a view of growing inflation, we are staring atfurther hikes of at least 75 bps during the current financial year.

The RBI, like most central banks across the world is now sucking excess liquidity from the system, to tame inflation. 

In May, during the unscheduled policy announcement, the top bank increased the Cash Reserve Ratio (CRR) by 50 bps taking it to 4.5 per cent. CRR is the percentage of total bank deposits that it has to maintain as liquid cash. 

As a result of this, banks are encouraging deposits by offering higher interest rates. In the fortnight ended June 3, the bank deposits grew Rs 1.59 trillion, taking the total to Rs 167.33 trillion. This was an over 9 per cent YoY jump in bank deposit growth.

Bulk deposit rates have seen the sharpest jump of 100-170 bps in a one-year bucket.

This means that in order to lend more, banks need to have higher deposits for which they will be required to offer higher savings rates. This will translate into higher interest rates across the spectrum, being offered to loan seekers.

While, lenders have passed on the increases to borrowers, the rates are still lower from their peaks. Weather it will hit the credit off-take and with what quantum is a situation which should unfold in time.

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