PSBs back on growth path as India's economic recovery gains traction

As economic recovery gains traction, loan demand from banks started improving from the second half of the 2021-22 with credit hitting 13 per cent in June.

According to the Reserve Bank of India’s Financial Stability Report (FSR), public sector banks recorded growth in industrial credit after almost three years of contraction.

A significant portion of new industrial loans was extended as working capital loans. Loan growth to the private corporate sector turned positive after two successive years of decline and deleveraging.

“Rapid credit expansion during the second half of 2021-22 was aided by new loan accounts in the industrial and services sector with the share of new loans increasing in successive quarters of the year,” the report said.

While the impetus to double-digit credit growth was from wholesale lending, retail credit growth continued to be robust.

Within the banking sector, private sector banks continued to outpace their counterparts in the public sector in credit growth, both wholesale and retail, the report said.

“The decline in credit to non-PSU cohorts during 2019-20 and 2020-21 has reversed, largely driven by private banks lending,” the report said.

On the interest rate risks in the bank books, the report said a survey of banks showed that 20 per cent of the loan book linked to external benchmark-linked loan rate has reset frequency less than the underlying benchmark.

“This may expose banks to basis risk. Moreover, over a third of the advances are at fixed rates in the case of private banks, which may experience unrealised losses through reduction in the NPV of future cash flows in a rising interest rate cycle and reduce their economic value of equity (EVE),” the report said.

PSBs, which have a larger share of MCLR-linked loans, may also be exposed to erosion in EVE as their deposit and lending rates are sticky and change less frequently than market interest rates.

Asset quality

Asset quality of small commercial banks (SCBs) continued to improve steadily through the year, with gross non-performing assets (GNPA) 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 (NNPA) ratio also fell 70 bps during 2021-22 to stand at 1.7 per cent at the year-end.

The provisioning coverage ratio (PCR) improved to 70.9 per cent in March 2022 from 67.6 per cent a year ago while write-off ratio declined for the second successive year to 20.0 per cent in 2021-22.

Capital

Capital raising and earnings retention by banks supported capital augmentation. The capital adequacy ratio has been on the rise since March 2020, improving further to 16.7 per cent in March 2022.

Stress test results reveal that SCBs are well capitalised and capable of absorbing macroeconomic shocks even in the absence of any further capital infusion by stakeholders.

“Macro stress tests reveal that all banks would be able to comply with minimum capital adequacy norms even in a severe stress scenario, although some segments as well as non-banking financial companies may be vulnerable to liquidity shocks,” the report said.