Despite considerable improvement in the asset quality, provision coverage ratio (PCR) and capital adequacy ratio (CAR) of banks, credit growth continues to be far from desired, particularly at a time when the economy struggling to revive in midst of the pandemic’s third wave.

The CAR of banks improved from 14.8 per cent in March 2020 to 16.3 per cent in March 2021. CAR of Public Sector Banks (PSBs) improved from 12.9 per cent to 14 per cent during the period. The gross non-performing assets (GNPAs) improved from 8.2 per cent in March 2020 to 7.7 per cent in March 2021. The GNPAs of PSBs had gone down from 10.3 per cent to 9.1 per cent during the corresponding period.

The improvement may partially be due to the restructuring of loans permitted by RBI due to Covid induced stress. As per ICRA’s estimates, 60 per cent of the total restructuring of ₹1.0 trillion under Covid 1.0 was accounted for by corporates and the balance (or ₹0.4 trillion) by the retail and MSME segments. Hence, the restructuring under Covid 2.0, which was available for retail and MSME borrowers added on to the stock of restructured assets under Covid 1.0 cumulatively lowering GNPAs.

It is also noteworthy that the corporate sector has deleveraged their balance sheet in the last two years and improved the repayment of loans. The fear of invocation of Insolvency and bankruptcy code (IBC) – 2016 by banks has also worked in improving asset quality of banks. Due to improved provision, the net NPAs (NNPAs) of banks went down from 2.8 per cent to 2.4 per cent while PSBs’ bad debts went down from 3.7 to 3.1 per cent reflecting improved PCR. But these improvements have not been reflected in increased off-take of credit so far.

 Debilitating credit growth

Credit growth continues to be sluggish at 6.7 per cent as on December 31, 2021 with no perceptible sign of revival. The quarterly RBI statistics indicate that credit growth was 7 per cent during Q2 of FY22, out which PSBs posted an abysmal growth of 3.7 per cent as against industry average of 7.4 per cent while private peers posted a growth of 10.9 per cent.

As a result, large number of low and medium end business entities connected to PSBs are scouting for support to come out of the pandemic crisis. On the whole, the credit growth has decelerated over previous two years, largely reflecting muted demand conditions compounded by risk aversion. The worst sufferers have been the micro small and medium entrepreneurs (MSMEs) borrower segment.

The monthly data of RBI on credit flow of November 2021 shows that credit to agriculture sector during November 2019-20, 2020-21 increased from 7 per cent to 10.4 per cent while credit to MSME was fragile at 0.7 per cent which reached3.8 per cent, much below any other sector during the two-year period.

Credit to services sector also fell from 8.2 per cent to 3.6 per cent. Personal loan segment was however a bright spot with credit growth rising from 9.2 per cent to 11.6 per cent. Lenders are more reluctant to reach out to low ticket loan segment which worsens the plight of entrepreneurs at the bottom of the pyramid.

Credit growth turned buoyant in the third quarter of the current fiscal by a wide margin at ₹3.5 lakh crore as against a steep decline by ₹2.2 lakh crore in previous fiscal indicating corporate sector plans for capacity expansion and increase capacity utilisation across sectors.

According to latest SBI research report – Ecowrap, credit growth had shown a visible expansion in Q3 of FY22 with incremental credit to deposit (CD) ratio reaching 133 per cent.

According to S&P Global Ratings, as the country’s economy recovers, the demand for credit could increase. Faster loan growth will improve the asset quality further and normalise credit costs over the next 12-18 months. With favourable financing conditions prevailing, and a powerful economic rebound under way with with largely positive credit momentum though downside risks cannot be ruled out due to new Covid variants.

With results of Q3 of FY22 ticking in, credit growth is showing some early signs of improvement though the industry level credit growth is still languishing in single digit. HDFC Bank had posted a credit growth of 16.4 per cent while ICICI Bank posted 16 per cent growth. The retail sector has been the big beneficiary with ICICI Bank retail credit growth reaching 19 per cent while HDFC Bank registered 13.3 per cent growth.

Kotak Mahindra Bank posted a credit growth of 18 per cent and Federal Bank 12 per cent. Among PSB, Canara Bank posted credit growth of 9.3 per cent year-on-year by December 2021. The trends of Q3 results reflects improved strengths of banks with better profitability which can again flow back to improve CAR. With Bad Bank becoming fully functional soon, banks should be in a better position to focus on lending.

The way forward

With Omicron’s impact on the economy being minima, demand for credit is set to improve. The next priority of banks obviously should be to accelerate flow of credit to industry to speed up revival of the economy.

Credit flow to MSMEs needs priority as livelihood of masses are connected more to the sector. The MSME entrepreneurs need to be brought into the formal financial system and all stakeholders including non-government agencies (NGOs) should persuade them to borrow and repay bank loans to maintain continuity.

The increasing depth of financial and digital inclusion built in the last few years should be harnessed well for deeper credit out reach. The corporate sector and large borrowers can access funds from multiple sources but the small and marginal entrepreneurs with high employment intensity have no source for funding. Small finance banks and PSBs should work in tandem using the co-origination model and collaborate with non-banks to reach out to lower borrower segments.

Use of technology and developing suitable infrastructure for automation of lending and recovery operations can bring down the costs making even low-ticket loans viable and sustainable. In gearing up for gradual but inevitable normalisation of interest rate trajectory, inflation and liquidity management, banks should steadily focus on reviving credit risk appetite. It can improve profitability and borrower outreach and help in the economy’s revival .

The writer is Adjunct Professor, Institute of Insurance and Risk Management – Hyderabad. Views expressed are personal

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