Credit growth showing signs of recovery, says RBI report
Illustration: Binay Sinha
Proving sceptics wrong, 2020-21 turned out to be the best in recent years for Indian banks in terms of their financial performance.
The pandemic-hit financial year was marked by a “discernible increase” in profitability, as banks’ income remained stable but expenditure declined, the Reserve Bank of India (RBI) observed in the annual Trends & Progress Report.
During the year, total income of banks remained stable, despite a marginal decline in the largest component — interest income — in an environment characterised by low credit offtake and interest rates, the report said. “The fall (interest income) was cushioned by a sizable increase in income from investments. Income from trading also accelerated, as banks booked profits on falling G-Sec yields,” it said.
Their expenditure contracted as interest expended on deposits and borrowing declined on account of moderation in interest rates and contraction in total borrowings.
“Profitability of banks, measured in terms of the spread between return on funds and cost of funds, improved with the decline in the latter exceeding that in the former,” the report said. Profitability or margin improvement was especially evident in the case of PSBs.
The declining trend in bad loans that started in 2018 continued during the pandemic year, which saw gross NPAs of scheduled commercial banks dropping to 7.3 per cent as of March 2021. It was 8.2 per cent in March 2020, and further to 6.9 per cent in September 2021.
“The provisional supervisory data suggests a further moderation in the ratio to 6.9 per cent by end-September 2021,” the report said.
The September figure of 6.9 per cent is the lowest in five years. The gross NPA of banks was 7.6 per cent in March 2016; it jumped from 4.6 per cent a year ago, mainly due to an asset quality review conducted by the central bank. Gross NPA peaked in March 2018 when it touched 11.5 per cent.
During 2020-21, the improvement in asset quality was driven by lower slippages, partly due to the asset classification standstill. With the decline in delinquent assets, their provision requirements also dropped and the net NPA ratio of public and private sector banks eased from the previous year.
“As observed since 2018, write-offs were the predominant recourse for lowering GNPA in 2020-21,” the RBI said. While asset quality improved, the standard restricted advances increased from 0.4 per cent in March 2020 to 0.8 per cent a year later.
Restructured standard advances further increased to 1.8 per cent at the end of September 2021 due to restructuring scheme 2.0 for retail loans and MSMEs which does not entail an asset classification downgrade, the banking regulator noted.
It has cautioned that incipient stress remains in the form of higher restructured advances. As a result, banks would need to bolster their capital positions to absorb potential stress, as well as to augment credit flow when policy support is phased out, the report said.
Loan growth recovery
Commercial banks’ loan growth — which was decelerating for the past two years reflecting muted demand conditions and risk aversion — showed signs of recovery in the first half of the current financial year.
“Within population groups, relatively higher credit growth in rural and semi-urban areas after the outbreak of Covid-19 is a bright spot. While PSBs (public sector banks) remained the major contributor of rural lending, given their reach and accessibility, the share of PVBs (private banks) has also climbed,” the report said, adding the credit-to-GDP ratio increased to a five-year high, “though still markedly lower than the G20 average.”
Deposit mobilisation in FY21 was the highest in seven years; it was mainly due to healthy growth in current and savings account deposits. The first half of the current financial year, however, saw some moderation, with normalisation in economic activities and a rise in inflation, the RBI added.