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Bad Loans Decline But Challenges For Banks Remain: FICCI-IBA Survey

Bankers have backed the idea of creating a development finance institution for infrastructure financing.

A man speaks on a mobile phone outside the State Bank of India building in Mumbai, India (Photographer: Adeel Halim/Bloomberg News)
A man speaks on a mobile phone outside the State Bank of India building in Mumbai, India (Photographer: Adeel Halim/Bloomberg News)

The quantum of bad or stressed loans in the Indian banking system has reduced over the last year and with the central bank easing monetary policy since January, credit growth in the country’s banks is set to revive.

That’s according to a survey conducted by the Federation of Indian Chambers of Commerce & Industry and the Indian Banks’ Association with 23 private, public sector and foreign banks during January-June.

Yet, challenges remain, the survey said, as bankers seek government and regulatory support to address troubles facing the financial system.

Infrastructure Financing

Bankers have backed the idea of creating a development finance institution for infrastructure financing, given that such a body will have better understanding of complex infrastructure projects and its funding needs.

Such a body will help improve existing underwriting standards for infrastructure finance across institutions through stronger project appraisals and credit monitoring, the survey said.

The DFI, bankers believe, will be better placed to address asset-liability problems banks faced in the past while funding such projects.

Bankers have suggested regulations to standardise lending practices and benchmark termination payment mechanism for key sectors like roads, power or ports. Easier project approval mechanism and a single-window clearance regime can reduce the time and risk in project execution, bankers said in the survey.

Bad Loans On The Decline

Over half of the banks that participated in the survey reported a reduction in their outstanding non-performing assets in the six-month period, compared with 43 percent during July-December 2018.

The NPAs of only 26 percent of banks rose between January-June, compared with 35 percent in the preceding six-month period.

Infrastructure remains the key sector with the highest number of NPAs, with around 25 percent of the survey respondents reporting an increase in stressed loans exposed to the sector during the last six months. In comparison, 63 percent of the banks reported a reduction in NPAs exposed to the sector in the last six months.

That’s an improvement from the previous survey round in which 42 percent of respondents cited an increase in NPAs in the sector.

Credit Standards

Close to half of the banks said in the survey that they have tightened their credit standards for large enterprises, while only 4 percent of the respondents said they improved credit standards for small-medium enterprise borrowers.

More than half of the banks said the risk of rising NPAs was the main factor behind the need to tighten credit standards, followed by high sector-specific risks and expectations of weak economic growth.

In the previous round 64 percent of respondents tightened their credit standards for large enterprises compared with 48 percent in the January-June 2019 round, which is reflective of an “improvement in funding”, according to the survey.

However, 19 percent of respondents expect credit standards for large enterprises to tighten between July and December while 76 percent of respondents said they will remain the same.

For SME borrowers, credit standards over time have remained fairly the same as most banks reported that they haven’t tightened credit standards for these borrowers.

Around 32 percent of respondents said credit standards for SME borrowers will ease in the next six months, compared with 64 percent of respondents saying it won’t change.

Interest Rates And Deposit Growth

The RBI slashed the benchmark repo rate by 75 basis points in the first six months of this year.

Around 48 percent of the survey’s respondents said they have reduced their marginal cost of funds-based lending rate during this period, to correspond with the central bank’s cut in the repo rate.

Overall, 70 percent of respondent bankers reported an increase in their share of current and savings account ratio deposits between January and June, with 61 percent of banks reporting a moderate rise and 9 percent reporting a substantial rise.

This is slightly lower than the previous round of survey, wherein 78 percent had reported a rise in share of CASA deposits.

Other Findings and Recommendations

  • Addressing agricultural distress should be one of the top priorities for the government, through an emphasis on reforms aimed at improving long-term productivity and strengthening the value chain across segments.
  • Alongside capital infusion in public banks, the government should take measures to address stress in the non-banking financial sector.
  • Public investment in infrastructure and affordable housing should be increased to kick-start private investment.
  • Resolution of bad loans under the Insolvency and Bankruptcy Code process and speedy disposal of cases at the debt recovery tribunal is required to curb NPAs, which can help free up resources for further lending.
  • Cash-In-Cash-Out networks will help achieve the government’s financial inclusion objective more economically compared with setting up additional bank branches and ATMs. But regulations are required to prevent fraud and incentivise merchants to use terminals for transactions and not just cash withdrawals.
  • Ongoing China-U.S. trade war presents opportunity to boost domestic exports in specific sectors, say bankers, which requires investment for capacity building and technology upgradation.