The RBI’s banking trends and progress report points to the urgent need to revive bank credit growth
The Reserve Bank of India strikes an upbeat note on the state of affairs after two waves of Covid in the latest Trends and Progress of Banking report, its annual stock-taking of the financial system. It finds that banks have been resilient to the pandemic disrupting credit offtake, pressuring rates and putting borrowers in a tight corner.
It unearths three trends that propped up bank finances while the economy was put through the wringer. One, with Covid prompting risk-aversion, households raised emergency savings and private businesses hoarded cash, resulting in banks seeing their deposit base rise from ₹140-lakh crore to ₹156- lakh crore in FY21. But banks preferred to deploy much of the incremental funds in gilts, while barely stepping up credit disbursals from ₹103-lakh crore to ₹108-lakh crore. The RBI posits that it is this ‘scissor effect’ — risk aversion among borrowers and lenders that is now causing credit to lag economic growth. Two, despite steep lending rate cuts prompted by MPC action, banks actually improved their spreads by booking hefty treasury profits and slashing deposit rates faster than lending rates. This suggests that the Centre is going to have a tough task reviving credit flow to the economy once the pandemic winds down, as banks appear to have found a cosy comfort zone in sourcing cheap deposits and lending to the government. Three, contrary to doomsday predictions of a spike in loan delinquencies, banks have improved their asset quality position in FY21, with their gross and net NPAs at 7.3 per cent and 2.4 per cent respectively (8.2 per cent and 2.8 per cent in FY20). They also raised their capital adequacy ratios from 14.8 per cent to 16.3 per cent. While this may be partly attributed to special dispensations such as the loan moratorium, NPA recognition standstill and leeway to restructure loans, the first two measures have already been wound down with no material change in the picture. But yes, banks and the regulator need to remain vigilant about restructured assets at 1.8 per cent of advances in September 2021, and the rise in Special Mention Accounts. While banks played it safe during the pandemic, NBFCs appear to have taken up the slack in lending, stepping up credit flow to MSMEs and experimenting with new co-lending and digital lending models on retail loans. While NBFCs also improved their capital buffers and asset quality in FY21, there seems to be disquiet about hidden stress in recent retail loans.
The report repeatedly credits the Centre and the RBI for their timely fiscal and monetary interventions (pegged at 14.6 per cent of GDP) that ensured financial stability through Covid. But then, the findings also make it clear that for banks to restart lending, savers to receive their due and industry to regain its animal spirits post-pandemic, these props will need to be withdrawn. Managing this ‘taper’ without destabilising the financial system will be the key challenge ahead for RBI and the Centre.