Most banks see bad loans ratio at 3.5% over next 6 months, credit growth of over 12%: FICCI-IBA Survey

A recent survey conducted by industry body FICCI and the Indian Banks Association (IBA) finds banks upbeat about growth prospects in the coming six months, expecting a continued improvement in asset quality. The 18th round of the FICCI-IBA Bankers’ survey was carried out from July to December 2023.

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, the survey report said.

The survey said India’s economy held relatively well (7.6%) in FY24 compared to other major economies, “driven by strong investment growth and a rebound in industrial activity. 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 survey findings show that long-term credit demand has seen continued growth for sectors like infrastructure, metals, iron and steel, and food processing. 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.

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.

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 FICCI-IBA survey said.

Around 70% of respondents have reported a decrease in the share of CASA deposits in total deposits.

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

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

On 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.

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. The proportion of respondent banks citing an increase in requests for restructuring of advances was 17%, the same as in the previous round.

“Bank-wise analysis reveals that 50% of participating PSBs have cited a decrease in requests for restructuring of advances while 30% of such respondents have reported an increase in such requests,” the survey said. 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.

Over half of the respondent banks in the current round believe that Gross NPAs would be around 3% – 3.5% over the next six months. Fourteen percent  of respondents said that NPA levels would be in the range of 2.5 – 3%.

“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 said.

As per respondents, some sectors that may continue to show NPAs over the next six months include textiles and garments, agriculture and gems & jewellery.

Banks were also asked about their preparedness for the 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.