Economic Survey: Banking system improved as NPA ratios declined & credit growth picked up

Economic Survey: Banking system improved as NPA ratios declined & credit growth picked up

Agency News

New Delhi, Jul 4: Performance of the banking system has improved as Non-Performing Asset (NPA) ratios declined and credit growth accelerated, the Economic Survey 2018-19 tabled in Parliament on Thursday stated.

The survey, presented by the Union Minister for Finance and Corporate Affairs Nirmala Sitharaman, said, "However, financial flows to the economy remained constrained because of decline in the amount of equity finance raised from capital markets and stress in Non-Banking Financial Companies (NBFC) sector. The eco-system for insolvency and bankruptcy is getting systematically built out. It has already led to recovery and resolution of significant amount of distressed assets as well as palpably improved business culture.

The survey states that during 2018-19, the growth rate of monetary aggregates reverted to their long term trend.

The currency in circulation increased by 22.6 per cent in the last financial year. Increase in net RBI credit was mainly from the recourse to open market operations undertaken during the year. Deposits with the banking system, both demand and time, recorded acceleration in their growth, leading to an increase in aggregate deposits by 9.6 per cent in 2018-19.

On the issue of liquidity, the economic survey states that the liquidity situation on average moved in the deficit zone in the last two quarters of 2018-19 as well as in the first quarter of 2019-20. The tight liquidity has shown up in interest rates as well.

There were three key factors leading to liquidity tightening. First the growth of bank credit has improved in the last two quarters of 2018-19, however growth in bank deposits remained tepid. The growth in currency in circulation also accelerated. Most significantly the RBI had to draw down its foreign reserves in excess of $ 32 billion in 2018-19 to smoothen exchange rate volatility. The RBI responded to solve this issue by infusing liquidity through means. During the year the 10-year benchmark g-sec were volatile.

The survey says that the performance of the banking sector, Public Sector banks in particular, improved in 2018-19. The Gross NPA ratio of Scheduled Commercial Banks decreased from 11.5 per cent to 10.1 per cent between march 2018 and December 2018.

Growth in Non-food Bank Credit (NFC), which remained sluggish in the last few years, showed improvement in 2018-19. Bank credit to large Industry and services segments were the main drivers of overall NFC growth in 2018-19. However the pace of credit growth has moderated in the last few months.

Non-Banking Financial Companies (NBFC) experienced difficult times in the aftermath of the ratings downgrades and default of IL&FS Group.

As NBFCs faced severe liquidity crunch, the government moved in quickly and took immediate measures to ringfence the problem and limit contagion. Squeeze in flow of resources to NBFCs has impacted the lending capacity of the sector in recent quarters.

The survey states that resource mobilisation through issuance of debt public issue rose quite significantly during 2018-19 as compared to the previous year.

However, there was a significant decrease in resource mobilisation through public issue and rights issue of equity. During 2018-19, Indian Corporates preferred private placement route to gear up capital requirements. The cumulative net assets under management of all Mutual Funds increased by 11.4 per cent to Rs 23,79,584 crore. There was a net outflow of Rs 5,499 crore by Foreign Portfolio Investors in 2018-19.

During the fiscal 2017-18, the gross direct premium of General Insurers (within India) was Rs 1,50,660 crore registering 17.6 per cent annual growth.

The survey states that the ecosystem for insolvency and bankruptcy is getting systematically built out with recovery and resolution of significant amount of distressed assets as well as palpably improved business culture.

Till March 31, 2019, the Corporate Insolvency Resolution Process yielded a resolution of 94 cases which has resulted in the settlement of claims of Rs 1,73,359 crore.

Moreover, as on February 28, 2019, 6079 cases involving a total amount of Rs 2.84 lakh crores have been withdrawn before admission under the provisions of IBC.

urther, as per RBI reports, Rs 50,000 crore has been received by banks from previously non-performing accounts. RBI also reports that additional Rs 50,000 crore has been "upgraded" from non-standard to standard assets. All these shows behavioural change for the wider lending ecosystem even before entering the IBC process. (UNI)