RBI survey sees credit demand improving in next three months

Demand for credit is expected to see marginal to considerable improvement in the next three months, according to majority of the respondents in the Reserve Bank of India’s latest systemic risk survey (SRS). 

This demand will be on the back of recovery in GDP growth, higher consumer spending, pick up in manufacturing sector activity, public investment in infrastructure and higher demand for working capital. 

Demand for credit is expected to “increase marginally” and “increase considerably” according to 67.4 per cent and 4.3 per cent of the respondents, respectively. 

The SRS was conducted among 48 respondents in May and presented in the Financial Stability Report (FSR), which was released on June 30.  

The demand for credit is expected to “decrease marginally” and “remain unchanged” according to 17.4 per cent and 10.9 per cent of the respondents, respectively. 

The FSR noted that bank credit growth is picking up steadily and is in double digits (11.5 per cent for all scheduled commercial banks as at March-end 2022) after a long hiatus. Banks have also bolstered capital and liquidity positions while asset quality has improved, it added.

Asset quality 

Around 38 per cent of the respondents expected “marginal deterioration” in asset quality of the banking sector over the next three months. 

This is attributable to factors such as Covid-19 induced regulatory forbearance, improved asset quality recognition, higher input costs, supply chain bottlenecks impacting profit margins of firms and tightening of monetary and liquidity conditions, according to the FSR. 

Among the 48 respondents, 40 per cent felt that the asset quality will remain unchanged over the next three months while 20 per cent expected marginal improvement. The remaining respondents expected asset quality to improve considerably. 

Nearly 44 per cent of the respondents judged that the prospects of the banking sector over a one-year horizon have improved and another 35 per cent expected it to remain unchanged. 

Major risk groups 

Among major risk groups, ‘global spillovers’ and ‘financial market volatility’ moved to the ‘high’ risk category from the ‘medium’ risk category in the November 2021 SRS. 

The respondents also assessed that macroeconomic uncertainty, though rising, remained a ‘medium’ risk. On the other hand, institutional risks and general risks are gauged to have moderated during the preceding six months though they stayed in the ‘medium’ risk category 

Global growth uncertainty, commodity price movements, geopolitical conditions and monetary tightening in Advanced Economies were perceived to be the major drivers of escalation in global risks. 

The rise in financial market risk was assessed to be emanating from tightening of financial conditions: foreign exchange pressure; interest rate and liquidity tightening; and elevated equity price volatility, per the FSR. 

Risk factors

The report said that a bearish outlook on domestic economic growth, inflation, current account balance, capital flows and fiscal deficit has led to intensification of overall macroeconomic risks. 

The respondents indicated a‘high’ to ‘very high’ probability of occurrence of a high impact event in the global financial system in the short run. They rated as ‘medium’ to ‘high’ the possibility of a high impact event in the domestic financial system for the same time horizon. 

According to FSR, asset quality of scheduled commercial banks continued to improve steadily through the year (FY22), with gross non-performing assets ratio declining from 7.4 per cent in March 2021 to a six-year low of 5.9 per cent in March 2022.

Net non-performing assets ratio also fell by 70 basis points during 2021-22 and stood at 1.7 per cent at the year-end against 2.4 per cent as at March-end 2021.

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