Demand Picks Up: Recent trends in bank lending

Recent trends in bank lending

The bank credit growth has remained tepid in recent years as it was impacted by lockdowns and associated restrictions to contain and mitigate the spread of the Covid-19 pandemic. However, deposit growth maintained an upward trajectory, with current and savings account deposits leading the way, re­flecting continued preference for precautionary savings. Bank lending is reviving in the on­going fiscal owing to economic recovery. Accor­ding to the bulletin published by the Re­serve Bank of India (RBI), the gross non-performing as­sets (GNPAs) remained stable during the second half of 2020-21, accounting for 7.5 per cent of total assets in March 2021. The overall provisioning coverage ratio increased from 66.2 per cent in March 2020 to 68.9 per cent in March 2021.

Size and growth

Bank credit to the infrastructure sector, which had witnessed a declining trend since 2009-10, picked up in 2018-19. Further, in 2020-21, bank credit to infrastructure increased by 3.6 per cent. The significant improvement in credit growth to the infrastructure sector during 2018-19 was on the back of fresh loan disbursements by banks, mainly to investors in sectors like power, roads and ports, telecommunications, construction, railways, oil termin­als and waterways.

As of September 2021, the exposure of banks to the infrastructure sector stood at Rs 10,860 billion as against Rs 10,152 billion as of September 2020. Lending to the road and power sectors has increased while credit to telecommunication has decreased. Overall, the perception of the banking industry towards infrastructure has improved.

The widespread use of debt moratoriums in response to Covid-19 has had a significant im­pact on stabilising financial systems. The RBI has launched a one-time debt restructuring sc­heme for pandemic-hit businesses to avert a surge in bad debts as the economy reels from the impact of Covid-19. The central bank has appointed a committee to lay down principles for the scheme, including safeguards, entry nor­ms and post-restructuring monitoring.

The pick-up in loan demand was largely due to the push from government schemes even as large corporates and top-rated borrowers continued to rely on capital markets and overseas markets where they can raise funds at much cheaper rates. However, the overall stance continues to remain cautious as the risk of non-performing assets (NPAs) is still looming large.

The retail, and micro, small and medium enterprise (MSME) portfolio of banks is rising, with muted/subdued loan demand from corporates due to the pandemic. Much of the lending is under the government’s Emergency Credit Line Guarantee Scheme for the MSME sector, under which the government provides 100 per cent guarantee to banks in respect of the eligible credit facility extended by them to its borrowers. As the economy recovers from the pandemic shock, lending to large corporates will see an uptick due to the huge pent-up demand and the restart of the capex cycle.

Stressed assets

The GNPA ratio of scheduled commercial ban­ks reduced from 8.4 per cent in March 2020 to 7.5 per cent in March 2021 due to lower slippages. Overall, the NPA provisions also contracted by 2.2 per cent year on year in March 2021. In 2020-21, banks showed an improvement in the slippage ratio, which measures in­cremental NPAs. It declined to 2.5 per cent in March 2021 from 3.8 per cent in March 2020. While there was a decline in large NPA acc­ounts with the resolution of cases under the insolvency and bankruptcy code and lower slippages in the corporate segment, there was an increase in retail NPAs and services.

Recently, the RBI has announced a revised prompt corrective action (PCA) framework for banks to enable supervisory intervention at an appropriate time and also act as a tool for effective market discipline. The revised provision will be effective from January 1, 2022. The key ar­e­as for monitoring will be capital, asset quality and leverage. Indicators to be tracked for capital, asset quality and leverage would be capital to risk weighted assets ratio/common equity Tier 1 ratio, net NPA ratio and Tier I leverage ra­tio respectively. A bank will be placed under the PCA framework based on the audited annual financial results and the ongoing supervisory assessment made by the RBI. The RBI may im­pose PCA on any bank during the course of a year (including migration from one threshold to another) in case the circumstances so warrant.

The GNPA ratio for infrastructure has been reducing and is currently 10.5 per cent (as of March 2021). The GNPA ratio declined from 13.1 per cent as of March 2020 to 10.5 per cent as of March 2021.

Recent developments

  • Cube Highways and Infrastructure has en­tered into a Rs 35 billion agreement with the State Bank of India to purchase the third bundle of toll-operate-transfer (TOT) road assets auctioned by the National Highways Authority  of India (NHAI). NHAI’s TOT model allo­ws com­­panies to pay the centre a one-time concession fee for rights to operate, maintain and collect toll on select national highway st­ret­ches for a period of 30 years. Cube High­ways, backed by infrastructure investor Sq­uared Capital, has a portfolio of around 28 operating highway projects with an aggregate length of 8,900 km across India.
  • The Uttar Pradesh government has received a sanction letter of Rs 51 billion loan for the 594 km Ganga Expressway project from the Punjab National Bank. The estimated cost of the project is Rs 362.3 billion. The six-lane ex­pressway will be expandable up to eight lan­es. The expressway will start from NH-334 in Me­e­rut and end at the Prayagraj bypass on NH-2, passing through the following districts – Meerut, Hapur, Bulandshahr, Am­roha, Sam­bhal, Badaun, Shahjahanpur, Har­doi, Unnao, Rae Bareli, Pratapgarh and Pra­yag­raj. With the completion of the project, the travel time from Lucknow to Meerut is expected to dec­rease to five hours and that from Prayag­raj to Meerut to six and a half hours. During the loan period, the ex­press­way will be owned and operated by the Uttar Pradesh Express­ways Industrial Development Authority. Ar­ound 92 per cent of the land required for the project has already been acquired.
  • NTPC Renewable Energy Limited (NTPC REL) has signed its first green term loan agreement of Rs 5 billion. The agreement has been sign­ed with the Bank of India for its 470 MW of solar projects in Rajasthan and 200 MW solar project in Gujarat for a tenor of 15 years. NTPC REL currently has a renewable project port­folio of 3,450 MW, of which 820 MW of projects are under construction and 2,630 MW of projects have been won, for which pow­er purchase agreements are pending execution.
  • Yamuna International Airport Private Limited has received the final credit sanction for Rs 37.25 billion from the State Bank of India for the development of the Noida International Airport in June 2021. The foundation stone for the airport was laid on November 25, 2021.  The airport is expected to be operati­onal by 2024 with an initial capacity to handle 12 million passengers per annum.

Next steps

As the economy begins to recover, the regulatory attention is moving towards addressing the vulnerabilities in the prevailing market. Several measures being taken by the RBI, other financial regulators and the government have help­ed curtail the solvency risk of financial entities, stabilised the markets and provided the necessary impetus for economic revival while maintaining financial stability. Going forward, continued efforts are necessary to maintain the resilience of the financial system.