Banks set for credit growth boost

Banks mired under the pincers of bulging Non-Performing Assets (NPAs) on one side and low economic sentiments on the other side have visibly slowed down in performance. They have thus been wriggling out to stay competitive despite some of the borrowers refusing to honour the loan contracts exacerbating asset quality woes.

• The macroeconomic factors that can stimulate credit growth in FY17 include fall in CPI and food inflation, rise in industrial activity in February this year after a three-month contraction and also forecast of ‘above normal’ monsoon by IMD. Besides, the revival of stalled infrastructure projects which is currently underway is likely to help banks to reduce their NPAs
  

Among the group of banks, the gross NPAs of Public Sector Banks (PSBs) have increased from 5.6 per cent as on September 2015 to 7.1 per cent as on December 2015. According to ICRA rating agency, the total stressed assets including restructured assets works out to 13.3 percent due to the ongoing cleaning up a drive of banks.

The gross NPAs of PSBs are expected to climb up further in Q4 of FY16 and in next few quarters in FY17. Due to such higher than expected slippage in asset quality, there has been significant dilution in the earnings of banks eroding their profitability. The annualised operating profits of banks in relation to net NPAs have dropped to 47 per cent in Q3 of FY16 down from 71 per cent in Q2 of FY16. Besides the asset quality woes, the demand for credit to has been low, adding to the constraints on the performance of banks.

Trends in credit growth
Credit growth in banks, when seen on a year-on-year (YoY) basis, has been subdued during FY16. The non-food bank credit increased by 9.9 percent YOY in February 2016 as compared to 9.4 percent recorded in the corresponding period in 2015, hovering still around the single digit.

As for as segment wise credit growth is concerned, credit in agriculture and allied activities increased by 13.5 per cent in February 2016 as compared to an increase of 16.5 percent a year ago. Credit to industry increased by 5.4 percent compared to 5.9 percent posted during the same period last year.

While credit growth continues to decelerate for most sub-sectors, credit to the services sector, however, increased by 8.6 percent as compared with 6.7 percent recorded in the previous year. The only sector that has shown substantial rise is in personal loans segment that increased by 19.2 percent up from 16.8 percent during the year.

But among the different groups of banks, the credit growth of PSBs trails at 7.45 percent in December 2015 compared to private banks which recorded 22 per cent credit growth. Sluggish demand for credit and piling NPAs of large borrowers has been forcing banks to expand retail credit to individuals.

Due to the slowdown in credit growth and subdued deposit growth recorded at 11 per cent, the Credit – Deposit Ratio stands at 77.6 per cent as on March 11th , 2016 while the Investment – Deposit Ratio works out to 28.2 percent. Though Statutory Liquidity Ratio stands prescribed at 21.25 per cent, higher investment in gilt-edged securities with RBI indicates lower lending propensity of banks. Contrary to such environment in FY16, the beginning of FY17 marks many positive changes that can put banks on a faster growth trajectory.

Improving economy
Some of the signs of macroeconomic factors can soon help banks to stimulate credit growth in FY17. CPI inflation in March 2016 stands at 4.8 percent YoY compared to 5.3 percent in February 2016, with the decline in both food and core inflation. Food inflation eased 20 basis points to 5.3 percent with most commodities clocking flat to easing trend.

It is backed by a rise in industrial activity with (IIP) recording 2 per cent rise on a YoY basis in February 2016, a distinct improvement after 3 consecutive months of contraction. Another one is the encouraging forecast of monsoon by India Meteorological Department (IMD). It has predicted an ‘above normal’ South-West monsoon (June-September 2016) in its first-stage forecast.

The rainfall activity is likely to be 106 percent of Long Period Average (LPA). According to RBI, the various factors of an economy can converge together to stimulate growth to 7.6 per cent in FY17.

Revival of stalled projects
One of the critical factors for a surge in bank NPAs is the stalled projects where banks have funded. Though as many as 304 projects involving an investment of Rs 12,75,877 crore remain stalled as on February 1, 2016, it is estimated to be close to 33 percent lower than prevailing in March 2015. Many have thus come out of the glut.

New projects are getting added to the stalled list on a quarterly basis and top 100 stalled projects mostly in the power, steel and railways account for major share of investments at Rs 10,41,281 crore. According to the PMG, about 149 stalled projects involving an investment of Rs 520,265 crore were resolved between January 1, 2015, and December 31, 2015, which can impact revival during the current fiscal.

Moreover, there has been a renewed emphasis on removing administrative hassles in implementing them. With partial loan disbursals made in some of these stalled projects, any progress in implementing them can revive the NPAs of banks.

Way forward
Due to the multi-pronged positive macroeconomic developments and favourable eco-system built to recover bank loans, it is expected that demand for credit will look up. Many of the large loans classified by banks as doubtful may add back to the standard category. Due to the stakeholder pressure, many corporate sector borrowers have begun to plan out loan repayment schedule, some of them selling their non-core assets.

With a pressure on industry forums and government agencies, many borrowers have realised the sense of urgency to ensure credit rotation. Borrowing and timely repayment can ensure that the healthy credit cycle and concomitant contribution to the growth of the economy can be ensured.

It is in the larger interest of borrowing community to protect their credit discipline so that banks can keep the stream of credit flow unabated. The trend ostensibly indicates a better credit growth and a decline in NPA levels, positivity to begin during FY17.