The banking sector is on a stronger footing with better resilience and improved capital adequacy ratio, according to the half-yearly ‘Financial Stability Report (FSR) – June 2021’ released by the Reserve Bank of India (RBI). Notwithstanding the fact that asset quality continues to pose a challenge, particularly when the economy is mauled by the second wave, its intrinsic strength has improved. Way forward, gross non-performing assets (GNPAs) may go up from 7.48% in March 2021 to 9.8% by March 2022 under base line stress, 10.36% under medium stress, and can reach a high of 11.32% in severe stress due to the Covid.
Public sector banks (PSBs) will have higher levels of GNPAs, from 9.54% in March 2021 to 12.52%, 13.06% and 13.95% in the three stress situations. The GNPAs of private banks is expected to move up from 4.78% in March 2021 to 5.82%, 6.04% and 6.48%, better than industry. Despite the Covid-induced stress, the asset quality status is much better than last year, maybe due to the forbearance on restructuring of loans and performing sectors of the economy servicing the loans.
The policy support of restricting dividend payments by banks could also bolster the capital base. They could also raise Tier-II bonds from the market. As a result, the capital to risk weighted assets ratio of banks improved by 130 basis points to reach 16.03%, far above the minimum prescribed level of 10.875% now which will rise to 11.5% from October 1, 2021, when Basel-III comes into force. The provision coverage ratio at 68.86% is close to RBI’s suggested level of 70%. Consistent RBI policy support helped in maintaining solvency and liquidity of banks.
Despite ample liquidity, allowing restructuring of loans by the RBI and the government introducing the Emergency Credit Line Guarantee Scheme (ECLGS), a government-guaranteed loan facility, banks’ credit growth has remained abysmally low. During 2020-21, bank credit increased 5.4% (y-o-y), the lowest in the last four financial years, particularly during a year when credit is needed to help hasten recovery. It continued to remain subdued in Q1:2021-22 (up to June 4). Credit by PSBs was still lower at 3.2%, while their private peers could post a credit growth of 9.9% (y-o-y). The credit growth of foreign banks was flat during the period.
Incremental credit to deposit ratio recorded an improvement during Q4:2020-21 but turned negative in Q1:2021-22 (up to June 4). As against lower credit growth, aggregate deposits of banks increased 11.9% y-o-y during 2020-21, but they have moderated during 2021-22 so far to grow at 9.7% by June 4, 2021. The liquidity inflows accompanied by higher deposit growth outpaced credit growth that added to surplus liquidity.
To dissuade banks from parking surplus liquidity, the RBI reduced the reverse repo rate to a low of 3.35%. As an incentive to banks to build up ‘Covid credit portfolio’, the RBI allowed them to place an amount equal to it under reverse repo that can earn 40 basis points higher at 3.75%. From the standpoint of strengths versus credit appetite, banks may have to think through.
Banks can use the recently announced stimulus package of the government to push credit growth. It provides fresh loan guarantees on different terms, other than ECLGS of up to Rs 1.1 lakh crore, of which Rs 50,000 crore is to be earmarked for financing the health sector in non-metro cities. Loans up to Rs 100 crore can be extended for three years at 7.95% interest. But government guarantee will be available up to 50% for existing borrowers and 75% for new loans. Rs 7,500 crore of guarantee for microfinance institutions for on-lending up to Rs 1.25 lakh to each borrower at a concessional interest capped at 2% over MCLR benefitting an estimated 2.5 million small borrowers.
The guarantee coverage of the ECLGS scheme has been extended from Rs 3 lakh crore to Rs 4.5 lakh crore. Now the elbow room has been expanded. These loans coming at a concessional interest rate can hasten revival.
Against these supportive measures of the government, RBI and better fundamentals of banks, credit growth is expected to improve when the pass-through impact of the various schemes results in credit flow. Many banks have begun to announce Covid-specific lending schemes, and the early signs of demand for credit are visible. Banks may have to galvanise their internal capability to improve their lending appetite further to pass on the benefit to the target group of borrowers.
Looking to the increase in scope and need for lending, banks will have to improve their processing, sanction and disbursement procedures to handle the increased volumes. Entertaining online queries, acceptance of digital copies of documents and identifying special Covid lending branches in large centres will be necessary. By following the traditional methods of lending, such surge in volumes cannot be handled efficiently unless loan appraisals, workflows, procedures, documentation are simplified.
The accelerated lending support will have multiple benefits more to the banking sector than to borrowers. When hassle-free quick loans are available, borrowers will be in a position to use the loans to improve their revenue streams to service the loans in future. It will prevent accumulation of non-performing loans. The benefit of revival of the economy will partly plough back to banks as deposits to improve their resource position. The systemic pressure to return the liquidity availed by the banks from the RBI can improve the follow-up and recovery of loans by using the early alert system.
Therefore, in the larger interest, banks will have to change their lending strategy from passive to active for their own growth. Missing this opportunity will marginalise their role in the economy and alternative financial intermediaries are well poised to take over. Hence, banks may have to quickly rejig their credit risk appetite.
(The author is former General Manager – Strategic Planning, Bank of Baroda. Views are personal)