Vijay Kumar Gaba

The latest credit and deposit statistics highlight some noteworthy trends in the Indian economy. During the first fortnight of June 2023, the credit offtake continued to grow at a healthy pace of 15.4% (yoy); though it slowed down on sequential basis. The deposit growth accelerated to 12.1% (yoy) narrowing the gap between credit-deposit growth to 337bps, the lowest in over a year. The gap recorded a high of 875bps in November 2022. Rise in deposit rates and withdrawal of Rs2000 denomination currency notes primarily led to the rise in deposits.

Credit deposit ratio at pre pandemic levels

The Credit to Deposit ratio has been generally improving since the later part of FY22 due to faster growth in credit compared to deposits. On a sequential basis in June 2023, it improved by 60 bps from the immediate fortnight (reported June 2, 2023, due to lower deposit growth than credit growth. The CD ratio is now closer to the pre-pandemic level of 75.8% in Feb 2020 and 75.7% in March 2020.

Liquidity tightening again

The liquidity in the banking system had shown significant improvement in the month of May due to deposits of Rs2000 currency notes and higher government expenditure, However, as per the latest statistics, the system liquidity had reduced to Rs0.83trn on 16 June 2023, as compared to Rs2.4trn on 02 June 2023. The weighted average call rate (WACR) was thus higher at 6.1% in the fortnight ended 16 June 2023, as compared to 4.5% in the comparable period in the previous year.

Personal and rural credit driving credit growth

The bank credit growth in recent months has been largely driven by personal loans, credit to NBFCs (largely consumer focused) and rural credit. A large part of incremental credit therefore could be unsecured.

In the month of May2023 about 42% of total outstanding bank credit was deployed in personal loans including credit card outstanding, and rural (non-food) loans. Personal loans (up 19.2%) were the fastest growing category in May 2023 (vs May 2022 as well as May 21). Credit card outstanding grew at over 30% (yoy) in May 2023.

Within personal loans unsecured loans grew 24% in May 2023, the fastest for any category. Food credit has been degrowing for almost two years, and now accounts for less than 0.25% of the total outstanding bank credit.

Housing loans (share of 47.3% within personal loans) grew by 14.6% y-o-y in May 2023 compared to 13.6% a year ago. Despite reporting healthy growth, the share of housing loans reduced to 47.3% in the personal loans segment as of May 19, 2023, vs. 49.2% over a year ago as unsecured loans grew at a faster pace.

Loans against gold jewellery also witnessed a strong growth of 22.1% y-o-y vs. a drop of 2.2% in May 2022 due to a sharp increase in gold prices in May 2023 vs May 2022. As the price of gold rises, it gives borrowers an additional opportunity to get more credit from the banks with the same quantity of gold.

Credit to NBFCs growing as faster pace

Lending to NBFCs grew by 27.6% y-o-y in May 2023. It continued to be driven by healthy growth reported by NBFCs for their loan disbursement and a shift of borrowings to the banking system. The Mutual Fund (MF) debt exposure to NBFCs also rose by 15.7% (yoy). The total bank lending to NBFCs has almost grown 3x in the past five years. The sharp rise in the popularity of equity funds in the past 5yrs has resulted in slower growth in the debt fund AUM of mutual funds; leading to the rise in reliance of NBFCs on bank credit. Besides, the international borrowings of NBFCs have also registered material decline in the post pandemic period.

Robust growth in credit to service sector

Service sector credit grew at a robust 21.4% in May 2023. Lending to NBFCs (27.6%) and Trade (17.5%) were the notable contributors in the service sector credit growth.  

Industrial credit growing at slower pace

The credit outstanding of the industry segment registered a moderation in growth at 6.0% y-oy in May 2023 from 8.8% in the year-ago period. The outstanding credit to industry accounted for ~24% of the total non-food outstanding. The credit to large industries grew just 3.9% (yoy), while MSME credit grew 12.3%.

The credit to infrastructure segment rose by 1.8% vs. 9.8% over a year ago period due to a slower growth witnessed by the power and road, also a drop in telecommunication and port segments. Overall, slow growth in infrastructure impacted the industry growth. The power segment, which accounts for over half of the infrastructure sector credit, witnesses a marginal growth of 0.3% in May 2023 vs. 9.3% in May 2022.

Asset quality improves NPAs fall to historic lows

Net Non-Performing Assets (NNPAs) of SCBs reduced by 34.0% (yoy) to Rs.1.3trne as of March 31, 2023. The NNPA ratio of SCBs reduced to 0.95% from 1.72% in Q4FY22 which is significantly better than the 2.1% level of FY14.

The GNPA ratio of SCBs reduced to 3.96% as of March 31, 2023, from 6.04% a year ago, and 7.58% as of March 31, 2021.

Accordingly, the provision coverage ratio of scheduled commercial banks (SCBs) improved to 76.3% at the end of March 2023.

For 4QFY23, the credit cost of SCBs stood at 0.58% sharply lower as compared to 1.44% seen in 4QFY21.

(Inputs taken from reports of RBI, SBI, and CARE Ratings. All rights duly acknowledged.)

Chart for the day

After almost a decade the Indian financial sector seems to be out of troubled waters. Almost all significant banks are beyond solvency concerns and set to progress in the path of growth. The asset quality has shown steady improvement for most banks despite Covid disruptions. The loan growth has improved from historic lows seen in the past few years. Earning growth is strongly aided by healthy recovery from the bad accounts.

Moreover, the loan books of most tier 1 and Tier 2 banks are tested for stress and provisions are adequate to meet most foreseen adversities. These institutions have come a long way from the first announcement of Dirty Dozen (the largest 12 non performing accounts) in the summer of 2017. Eight of the notified 12 accounts have been resolved with more than 50% recovery. Resolution is under progress for two accounts and the other two are under liquidation. As of the end of FY22, no major potential stressed account has been reported that can materially alter the current status of any bank. The credit cost from hereon will mostly be under control with some defaults in the normal course of business.

The best part is that the rather stringent provisioning and disclosure norms have significantly enhanced the credibility of the books of banks. The capital adequacy is positive for aggressive lending. Obviously the outlook for Indian banks is bright and buoyant.

Most of the non-bank lenders (NBFCs) are also back on the path of steady growth. The asset liability mismatch (ALM) and asset quality concerns have been mostly addressed by almost all meaningful NBFCs. Many weaker players have been eliminated from the market. For the survivors, the business is brisk and profitable.

Obviously, for the investors in the financial sector better times lie ahead, even if the consensus overweight on the financial sector might slow down the trajectory of gains a little.

Notwithstanding the air of optimism all around, the sky may not be all blue and bright. There are scattered clouds that do not look menacing as of this morning; but certainly warrant a watch.

I shall be in particular watching some conglomerates that are growing too fast (both organically and inorganically) and are considerably leveraged. In some cases the leverage appears supported by the balance sheet that might have been engineered to look healthy but not necessarily backed by tangible assets. The cash generation is poor; thus the servicing capability could be severely impaired if the things do not go as per the plan, raising the spectre of dirty dozen all over again.

The number of systemically important (too big to fail) financial institutions is also growing steadily. The regulator (RBI) is keeping a closer vigil on these institutions. Additional regulatory provisions have also been prescribed for these. Nonetheless, in case of a global contagion like dotcom (2001-2001) or global financial crisis (2008-2009) the probability of a “big tree collapsing” in India is now certainly not zero.

From the business viewpoint, I hope that while aiming to achieve global size and economies of scale, the Indian managements would have learned key lessons from the decline of global conglomerates like General Electric and General Motors and demise of Lehman and Merrill Lynch etc.

May 2021 Bulletin of the Reserve Bank of India, carries some useful insights about the performance of NBFCs during the pandemic. Being a critical source of consumer and MSME finance, performance of NBFCs is usually a broad indicator of the consumption demand, and consumer and business sentiments.

The key highlights of the NBFCs performance, especially during 2H2020, are noted as follows:

·         Pandemic has hit NBFCs hard. “The impact of the pandemic can be seen on both asset quality and liquidity, although the latter was addressed to a considerable extent through timely policy measures.”

·         An unfavourable mix of COVID-19, sell-offs in financial markets and the abrupt winding-up of specific schemes by a mutual fund contributed to NBFCs facing record spike in yields on their debt in Q1: 2020-21. The sharp market differentiation continued between the highly rated and other NBFCs, notwithstanding the surplus liquidity and aggressive policy rate cuts.

·         Retail participation in the NBFC debenture issuances, notwithstanding their small share in overall subscription, witnessed an upswing since June 2020, whereas Mutual funds reduced their exposure to NBFC CPs between March and September 2020 However, Q3:2020-21 witnessed a renewed interest of mutual funds in NBFC CPs. Banks’ subscription of CPs has also increased at a steady pace after Q1:2020-21.

·         The number of deposit-taking NBFCs (NBFCs-D) has gradually diminished and currently stands at 64, of which six have been prohibited by the RBI from accepting further deposits.

·         The consolidated balance sheet of NBFCs registered a Y-o-Y growth of 13.0 per cent and 11.6 per cent in Q2 and Q3:2020-21, respectively. “This double-digit growth in an adverse macroeconomic environment points to the resilience of NBFCs, which were able to cushion the impact of the pandemic on their balance sheets through quick adoption of technology, policy support and reasonably strong fundamentals.”

·         NBFCs continued to preserve cash to ensure adequate liquidity in view of the prevailing uncertainty due to the pandemic.

·         Due to risk aversion and market pessimism post-IL&FS, the share of market borrowings (debentures and CPs) in the total borrowing had fallen and correspondingly the share of bank borrowings had risen. NBFCs also moved towards longer term borrowings in tune with the tenure of their assets to manage their asset-liability mismatch.

·         In Q2 and Q3:2020-21 market conditions had eased, as indicated by the pick-up in market borrowings, particularly in debenture issuances. In the same period, bank borrowings grew at a robust pace, although slight deceleration was exhibited in Q3:2020-21.

·         In the aftermath of the IL&FS event, the NBFC sector attempted to realign its asset-liability mismatches by moving away from short-term borrowings to long-term borrowings. Accordingly, term loans growth remained high at 22.6 per cent and 18.3 per cent in Q2 and Q3:2020-21 (Y-o-Y), respectively.

Term loans constituted over four-fifth of NBFC bank borrowings at end-December 2020, followed by working capital loans and cash credit. While term loans continued to grow at a robust pace, they exhibited a deceleration in Q2 and Q3:2020-21, compared to Q2 and Q3: 2019-20 reflecting tepid demand for on lending of funds. An uptick in working capital loans was witnessed in Q3: 2020-21.

·         Over 70 per cent of the NBFC borrowings are now payable after 12 months and their share has remained stable, indicative of the growing market discipline among NBFCs. Similarly, over 70 per cent of NBFC advances are also now long term (that is, receivable after more than one year).

·         The industrial sector remained the largest recipient of credit from NBFCs-ND-SI even as its share moderated between Q3:2019-20 and Q3:2020-21. Retail sector, followed by services, are the other major beneficiaries and their share grew during the period under consideration.

·         Industrial sector, particularly micro and small and large industries, seemed the worst hit by the pandemic as they posted decline in credit growth. Imposition of lockdown, abrupt stoppage of economic activities and disruption in supply chains to contain the spread of the virus could have affected these sectors the most.

·         Passenger vehicles sales increased by 13.6 per cent in December 2020. It is mirrored in the disbursal of vehicle loans by NBFCs, as these loans grew by 10.7 per cent in Q3:2020-21. Loans against gold also grew robustly as it filled in the cash requirements and possible working capital requirements of small firms.

·         The profitability of the NBFCs improved in Q2:2020-21 compared to the corresponding quarter of the previous year on account of steeper fall in expenditure than in income. Given the persistence of infections, the full effects of the lockdown and suspension of business on the asset quality of NBFCs will be evident gradually.