: Opinion: Banks must revive lending #IndiaNEWS #News By Dr K Srinivasa Rao Despite the ongoing twin crisis – lingering Covid-19 and war between Russia and Ukraine, banks have gained strength in the

Opinion: Banks must revive lending #IndiaNEWS #News
By Dr K Srinivasa Rao
Despite the ongoing twin crisis – lingering Covid-19 and war between Russia and Ukraine, banks have gained strength in the last couple of years. The RBI’s Financial Stability Report-June 2022 reflects improved asset quality and capital adequacy ratio (CAR). The asset quality of banks continued to improve steadily with the gross non-performing assets (GNPA) ratio declining from 7. 4% in March 2021 to a six-year low of 5. 9% in March 2022.
The GNPAs of public sector banks stand at 7. 6% as against private banks’ 3. 7%. More notable is the low asset quality slippage ratio (from standard to substandard) of public sector banks pegged at 0. 8% of assets against 1. 3% of private banks.
Asset Quality
The net non-performing assets (NNPA) ratio too fell by 70 bps to 1. 7% during the period. The provisioning coverage ratio (percentage of funds set aside for losses due to bad debts) improved to 70. 9% in March 2022 from 67. 6% a year ago. The amount of loan write-off declined for the second successive year to 20% during FY22.
Though some Covid-induced stressed assets are classified as restructured loans under the RBI restructuring schemes – I and II, it does not undermine the trend. The stock of restructured loans of banks works out to one per cent under Resolution Framework (RF) – 1. 0 and 1. 6% under RF – 2. 0. Even if all of them slip into GNPAs, the asset quality will still stand better in single digit.
The emerging asset quality trend when seen together with the launch of National Asset Reconstruction Company Ltd projects a sustained improvement of asset quality. It is expected that banks may further improve asset quality from 5. 9% in March 2022 to 5. 3% by March 2023 continuing the declining trend under the baseline scenario driven by higher expected bank credit growth. The reason could be the move of the corporate sector and businesses to deleverage their balance sheet and consolidate the finances.
With the newfound strengths, banks should be able to increase the flow of credit to productive sectors of the economy to hasten the revival, more importantly, the high-contact industry.
Demand for Credit
The latest RBI data indicates that the year-on-year deposit growth of banks has gone down from 10. 3% to 8. 3% as of June 17, 2022, while the credit growth dramatically more than doubled from 5. 8% to 13. 2%. Banks will have to work hard to augment deposit growth to be able to meet the increased demand for credit, failing which they may face risks of asset-liability mismatch. Another challenge is the rise in the cost of resources and hardening bond yields due to the RBI approach to absorb excess liquidity from the markets to tackle the inflation beast.

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