Asset quality of banks to further improve over next six months: Survey

Resilient domestic economy, pick up in credit growth supported by government capital expenditure (capex), robust recovery mechanism, high provisioning and high write-offs were cited as the key factors by bankers who expect asset quality to further improve over the next six months, a FICCI-IBA Bankers’ Survey showed.

As per respondents, some of the sectors that may continue to show NPAs over next six months include textiles and garments, MSME, aviation, agriculture and retail trade.

The seventeenth round of the FICCI-IBA survey was carried out between January to June 2023. A total of 24 banks including public sector, private sector and foreign banks participated in the survey. These banks together represent about 79 per cent of the banking industry, as classified by asset size.

Credit growth rose along with the robust economy which rose at 7.2 per cent in the last financial year and at 7.8 per cent in the first quarter of current fiscal.

The health of the banking sector has witnessed an encouraging turnaround, marked by healthier bank balance sheets and gross NPA ratio at a decade low.

The survey findings show that long term credit demand has seen continued growth for sectors such as infrastructure, textiles and chemicals. food processing and metals. Iron and steel has also witnessed accelerated long-term loan disbursements in the past six months.

Infrastructure is witnessing an increase in credit flow with 67 per cent of the respondents indicating an increase in long-term loans as against 57 per cent in the previous round. The survey suggests that the outlook on expectation on growth of non-food industry credit over next six months is optimistic with 42 per cent of the participating banks expecting non-food industry credit growth to be above 12 per cent (as compared to 36 per cent in the previous round).

Given the higher rates of interest, a shift towards term deposits has been observed. Over half of respondent banks (57 per cent) reported a decrease in the share of CASA deposits in total deposits in the current round of survey. The term deposits have picked up pace as reported by the respondent banks.

According to the survey, 54 per cent of respondent banks reported that the credit standards for large enterprises have remained same (83 per cent of the banks reported so in the last round). In the current round of survey, 29 per cent of participating banks reported easing of credit standards, indicating continuous improvement in funding. For SMEs too, 68 per cent of the respondents have reported no change in credit standards in the current survey round.

Asset quality improvement

75 per cent of the respondent banks reported a decrease in the NPA levels in the last six months as compared to 90 per cent banks that reported so in the previous round. An overwhelming 90 per cent Public Sector Banks have cited a reduction in NPA levels while amongst participating Private sector banks, 80 per cent banks have cited a decrease. Amongst the sectors that continue to show high level of NPAs, most of the participating bankers identified sectors such as infrastructure, textiles and food processing.

Startup funding

Most banks reported that they are well-equipped in terms of capital and some of them have also set up start-up verticals catering to this requirement. Banks also suggested some additional measures that can be taken by banks to further improve the funding for start-up ecosystem.

These included streamlining of loan application and approval process for start-ups which may be done in collaboration with fintech; establishing of specialised divisions catering to special financial needs of start-ups; exploring alternate forms of collateral such as IPR, equity stakes, etc; partnering with incubators, accelerators and VCs; organising financial education workshops specifically for start-ups.