Most banks expect bad loans ratio to be around 3.5% in next 6 months, credit growth at 12%: FICCI-IBA Survey

A recent survey by industry body FICCI and the Indian Banks Association (IBA) has found that banks are experiencing a good phase with the Indian economy doing well (7.6%) in FY24 compared to other major economies driven by strong investment growth and a rebound in industrial activity. The majority banks are expecting Gross NPAs in the range of 3% – 3.5% over the next six months.

The survey noted that speaking about asset quality, a large majority (77%) of the respondent banks reported a decrease in the NPA levels in the last six months. 

All responding PSBs have cited a reduction in NPA levels while amongst participating private sector banks, 67% have cited a decrease.

Only 22% of private banks reported an increase in bad loans over the last six months. Amongst the sectors that continue to show a high level of NPAs, most of the participating bankers identified sectors such as food processing, textiles, and infrastructure.

Respondent banks were more sanguine about the asset quality prospects in the current round of the survey, cushioned by policy and regulatory support and this was reflected in the survey results.

Besides, the survey findings noted that credit growth also continued to rise, supported by factors such as economic expansion and a continued push for retail credit which has been supported by improving digitalisation. The banking sector’s clean balance sheets support further loan growth going forward.

“Resilient domestic economy accompanied by pick up in credit growth supported by Govt capex, rising provision coverage ratio, restructuring and rehabilitation of all eligible stressed units, mobilisation of OTS proposals, robust recovery mechanism, and initiation of SARFAESI action in all eligible cases in a time bound manner were cited as the key factors by respondent bankers who expect asset quality to further improve over the next six months,” the survey noted.

A total of 23 banks including public sector, private sector and foreign banks participated in the survey. These banks together represent about 77% of the banking industry, as classified by asset size. 

Here are the top points highlighted in the survey:

1. The survey findings show that long-term credit demand has seen continued growth for sectors like infrastructure, metals, iron and steel, and food processing. 

2. Infrastructure is witnessing an increase in credit flow with 82% of the respondents to the FICCI-IBA survey indicating an increase in long-term loans as against 67% in the previous round.

3. The survey suggests that the outlook for non-food industry credit over the next six months is optimistic with 41% of the participating banks expecting non-food industry credit growth to be above 12% while 18% feel that non-food industry credit growth would be in the 10%-12% range.

4. About 36% of the respondents are of the view that non-food industry credit growth would be in the range of 8%–10%. 

“Customers’ search for higher rates and the ability to lock those interest rates for a longer time has led to a shift in favour of term deposits. As such, term deposits have picked up pace as reported by the respondent banks,” the survey stated.

5. According to the survey, 65% of respondent banks reported credit standards for large enterprises have remained unchanged as against 54% in the last round. 

6. Respondents reporting easing of credit standards has decreased to 17% in the current round as against 29% in the previous round while those reporting tightening in credit standards were largely the same as in the previous round.

7. For SMEs, 64% of the respondent banks reported no change in credit standards in the current round, and 27% reported easing of credit standards.

8. Over 40% of respondents reported a decrease in requests for restructuring of advances in the current round of the survey as compared to 54% in the previous round. 

9. On eventual adoption of Expected Credit Loss(ECL) -based provisioning, the majority of the respondent banks stated that they were well-positioned for a smooth transition to the ECL regime and have put in place models and frameworks for ECL-based provision computations which are being reviewed and validated internally.