The Governor of the Reserve Bank of India (RBI) recently advised banks to remain vigilant of the evolving macroeconomic situation, including global spillovers, and expressed concern about slowing deposit growth in relation to credit growth.

 

Credit demand/growth in India

  • Credit demand rises with economic activity and banks’ credit-disbursing capacity is determined by their in-house reserves.
    • Credit growth was on a downward trend during the pandemic due to decreasing economic activity.
    • With economic activity returning to normal, credit growth has increased, particularly in the preceding three quarters.
  • According to the RBI, domestic aggregate demand has an uneven character at the moment. Urban demand appears to be healthy and rural demand has recently begun to gain strength.
  • Commercial bank credit growth has also been strong, led by services, personal loans, agriculture, and industry, indicating an increasing preference for bank credit to satisfy working capital needs.

 

Deposit growth in relation to credit growth in India

  • According to the latest RBI data for scheduled commercial banks, aggregate deposits increased by 2% year on year (YoY) in comparison to 11.4%, while credit off-take increased by 17%, compared to a 7.1% growth YoY.
  • Deposit growth has not declined significantly, but it has fallen in comparison to credit growth, which has increased in recent quarters.
  • As a result, banks’ net interest margins have improved, but it did not increase their ability to disburse further credit.

 

Banks’ asset quality in India

  • The RBI reports that the bank’s gross non-performing assets (GNPAs) have consistently dropped, with net NPAs falling to 1% of total assets.
    • A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
  • Though MSME NPAs (around 15% of the banks’ loan book) are expected to rise, overall NPAs for banks are likely to fall as the corporate category (roughly 45% of loan books) drives the downward trend.
  • The improvement in asset quality on the corporate loan book is due to the de-leveraging over the years, in which most corporates have been able to reduce their debt levels and enhance their credit profiles.
  • Corporate NPAs are likely to decline as a result of the establishment of the National Asset Reconstruction Company Ltd (NARCL), which is expected to take over some of the legacy corporate loan NPAs still held by banks.
    • NARCL, a government entity, has been incorporated on 7th July 2021.
    • It is registered with the Reserved Bank of India as an Asset Reconstruction Company under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
    • NARCL has been set up by banks to aggregate and consolidate stressed assets for their subsequent resolution.
    • PSBs will maintain 51% ownership in NARCL.
  • However, in light of the macroeconomic scenario, market participants have expressed concern about corporate loans.