IBC proven to be successful with resolution of stressed assets: FICCI-IBA Bankers' Survey

The seventh round of the FICCI-IBA survey was carried out for the period January to June 2018. A total of 22 public sector, private sector and foreign banks participated in the survey. These banks together represent 64% of the banking industry, as classified by asset size. The survey has been conducted at a time when NPAs have shot over Rs. 10 trillion and continue to rise. The Insolvency and Bankruptcy Code (IBC) has shown success with resolution of stressed assets even as the law continues to evolve. Banks continue facing challenges in lending even as GDP growth has bounced back while CPI inflation faces upward risks in the form of rising oil prices and increasing government expenditure. The current round of FICCI-IBA Bankers' survey also covers respondents' views on recent amendments to the IBC, Central Bank Digital Currency and MSME financing.

The survey findings reveal stark difference in the banking sector performance as compared to July - Dec 2017 period on the parameters studied. 67% respondents among participating banks have reported tightening of standards, steeply increasing from 28% in the last round of the survey. Proportion of respondents who have maintained credit standards fell to 23% from 67% in the last round. Since RBI had signaled tightening of the monetary policy by increasing the repo rate in view of expectations of higher inflation, banks had also increased their lending rate. Banks have already started offering higher interest rate on deposits which also increases their cost of funds. Further, in view of the stress in the asset portfolios, banks have generally adopted a cautious approach on lending to prevent fresh slippages. It is pertinent to note that increase in deposit rates would benefit the millions of depositors who have been getting lower rate for quite some time.

In the first half of 2018, RBI hiked the repo rate by 25 bps in June 2018. As per the survey, over half of the respondents (55%) have increased their MCLR by up to 20 bps during the period Jan-Jun 2018. Further, 27% respondents increased MCLR by more than 30 bps. Since then another hike in repo rate by 25bps was announced. In case of term deposits, 41% respondents increased their rates by more than 50 bps on term deposits of tenure below one year, while 50% did so for term deposits of one year or above. 32% respondents reported a rise in rates by up to 50 bps for term deposits tenured below one year, while 36% did so for those above one year. This is a reversal of trend from the last round of the survey, when majority respondents had decreased rates for both kinds of instruments.

There has been an increase in CASA deposits in the first half of 2018. In this round of the survey, 68% respondents recorded an increase in their CASA deposits, up from 48% in the last round, with 14% banks indicating a substantial rise. This rise has been attributed to factors like broadening of customer base, higher rate on savings deposits and new product offerings. Similar to the previous round of the survey, 59% of the respondent banks reported a rise in NPAs in the current round of the survey. Infrastructure, metals and engineering goods were the key sectors reported with the highest NPAs. More than two-thirds of the respondents have cited these as sectors with high NPAs. Other major sectors with high NPAs are Engineering Goods, Textiles, Food Processing and Gems and Jewellery.

Banks were asked if they saw any improvement in recovery rate since the implementation of the IBC and were asked to provide suggestions to further improve it. Most responding banks agreed that the IBC has put recovery process on a faster track and improved recovery position of banks. They highlighted that it has also increased promoters' willingness to come forward for resolution at an early stage of default. To improve the resolution, bankers suggested enhancing capacity, strengthening of the judiciary, empowerment of local level government officials among other suggestions.

Respondents were also asked to provide views on the recent amendments to IBC recognising home buyers as financial creditors. Most of the respondents said that this will bring in more discipline in builder segment. Respondent banks also mentioned that this provision provided an additional safety net to buyers along with relevant rules under RERA.

In view of the inter-departmental group set up to study feasibility of the introduction of a central bank digital currency (CBDC) formed by the RBI, bankers were asked for their views on same. Participating bankers have highlighted the benefits from CBDC, key concern areas and provided suggestions. Introduction of CBDC would increase digitization and greater competition between banks for deposits, benefitting depositors.

Respondents were also asked to give various suggestions to close the MSME financing gap and share their views on potential collaboration of the banking sector with fintech companies for this purpose. Suggestions included setting up of credit history database for MSMEs to address the issue of information asymmetry that restricts lending to MSMEs. Respondents said that with innovative technologies and business models, fintech platforms enjoy a competitive edge due to cost-effective operations and fewer regulations than the traditional finance sector, citing that fintech can have a significant role to play in MSME financing.

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