Our banks are in better shape than anticipated
PremiumConcerns over another pile-up of bad loans on account of the covid crisis are turning out to be overblown. Asset impairment seems moderate. This augurs well for economic expansion
Even as vast stimulus and other support measures have helped India’s economy more or less regain its pre-covid size, the after-effects of that crisis have been a matter of concern. A particular worry was the impact on the non-performing assets (NPAs) of banks. Since various debt rework and relief measures—aimed chiefly at easing repayment terms—were declared during the pandemic, we feared these might kick a covid-restuffed can of bad loans down the road, setting lenders up for a sharp drop in asset quality—despite a state backstop for some loans—and a resultant squeeze of capital cushions along our path to normalcy. While the scenario could yet worsen as interest rates rise and repayments come due amid rising business costs, the signals so far suggest those fears were overblown.
Take the latest round of a survey by the Federation of Indian Chambers of Commerce and Industry (FICCI) and Indian Banks’ Association (IBA). Conducted over the first half of 2022 across 25 lenders in India that account for three-quarters of the sector’s assets, it reveals a fair degree of comfort. Unlike last year’s majority, only a small fraction of surveyed banks reported rising requests for loan rejigs. Among state-run banks, with which a bulk of the NPAs usually reside, 89% saw their bad loans on the decline; among private banks, two-thirds did. Half the respondents expected NPAs to be under 8% of advances by the end of 2022, with a third projecting 8-9%. This would be an upswell from the end-March gross figure of 5.9%—a six-year low—published by the Reserve Bank of India (RBI) in its last Financial Stability Report (FSR), but still not in double digits. The FICCI-IBA survey points to a rebound in commercial activity. Sectors like infrastructure, chemicals, food processing and steel are witnessing healthy demand for long-term credit, while a few are still struggling. Micro, small and medium enterprises, easing credit for which was a major part of our pandemic provisions, have not bounced back the way larger firms have and distress among them could smudge loan books. Although the story of contact-intensive services has been one of fits-and-starts, a steady recovery should lend them stability.
Unless there are nasty surprises in store, banks look unlikely to run short of capital in the near term. Their buffers are adequate. RBI’s June FSR put their cushion at an impressive 16.7% of risk-weighted assets (“a new high"). Moreover, the central bank’s adversity-scenario tests found that banks would hold their own even under severe stress. As lenders need to be in a strong position to fund the credit expansion we need for rapid economic growth, a picture that’s turning out brighter than feared is indeed reassuring. Indian businesses remain largely reliant on bank lending for growth capital, after all, and we cannot afford a return to times past when over a tenth of all assets were marked as having gone bad. Before the viral outbreak, much policy effort was dedicated to lowering default rates, including the adoption of a bankruptcy code that empowered creditors to recover their dues via an orderly process; yet, banker anxiety and a growth slump had both reduced credit flows. As our economy emerges from two years plus of covid turmoil into a world roiled by a war in Europe, we must confront another complex set of macro challenges. But today’s hope is that old pathologies of the banking sector have by and large lost their ability to menace our economic prospects.
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