Improving confidence

A healthy banking system will support growth

After a decade of rising non-performing assets (NPAs) and lax underwriting standards, particularly on corporate loans, the Indian banking sector is now in good health, with rising profits and the restoration of investor trust. This was reaffirmed in a recent survey of bankers conducted by the Federation of Indian Chambers of Commerce and Industry and the Indian Banks’ Association. The survey, covering 23 banks, showed the sector continued to perform well on several parameters, including asset quality and credit growth. The survey findings also report that banks are well-positioned to transition to the expected credit loss (ECL) regime, and are taking steps towards climate adaptation and mitigation. These include focusing on green financing, going paperless, and implementing environmental campaigns like promoting bio-fencing in coastal regions as part of their ESG (environmental, social, and governance) initiatives.

About 83 per cent of the respondent banks reported unchanged or easing credit standards, citing a positive growth outlook for the economy, the decline in NPAs, and low sector-specific risks. There has also been an increase in long-term loan disbursements for certain sectors, including infrastructure, iron and steel, food processing, and pharmaceuticals. Notably, as identified by the respondent banks, these are also the sectors with higher levels of NPAs. If these sectors happen to get easy access to credit, the issue deserves attention. Banks must avoid getting into the high NPA cycle again. They, however, are generally optimistic about the level of stressed assets on their books, with 77 per cent of the respondent banks reporting a decrease in the NPA levels over the last six months. Over half the respondent banks in the current round say gross NPAs would be in the range of 3-3.5 per cent over the next six months. The optimism is not unfounded, given the sharp decline in gross NPAs from 11.6 per cent at the end of FY18 to 3.2 per cent in September last year. The slippage ratio, which measures new additions to bad loans, has also moderated. Naturally, low slippages will translate into improved asset quality across all bank groups.
 

It is indeed a relief that both public- and private-sector banks are in good health. However, concerns remain regarding future profitability. The survey finds a significant shift towards term deposits offering higher rates of interest. Nearly 70 per cent of the banks reported a decrease in the share of current account savings account (CASA) deposits in total deposits. CASA is low-cost deposits mobilised by banks, and lower amounts of low-cost deposits imply lower profit margins. Further, a significant number of fraud cases within the banking sector, along with high levels of interconnectedness between commercial banks and non-banking financial companies (NBFCs), can increase contagion during times of stress. The Reserve Bank of India has flagged the issues of interconnectedness in its recent publications. In this regard, NBFCs must be nudged to diversify their funding sources away from banks. Nonetheless, the overall improved health of the banking sectors should support growth momentum in the economy. The Union government has supported economic recovery from the pandemic through substantial increases in capital spending and it is now time for the private sector to push capex. A healthy bank balance sheet will help enable this transition.