The strong growth in credit offtake is expected to sustain in the coming months and, coupled with a pick-up in private capex, will usher in a virtuous investment cycle and spur economic growth, according to the Economic Survey for FY23.
The credit upcycle will also be supported by constant monitoring of risks in the financial system by the regulators and their efforts to contain them. Once the fog of uncertainty lifts, strong macroeconomic fundamentals will underpin the return of global capital flows to India, it said.
While monetary conditions are expected to remain tight worldwide due to hawkish stances of key central banks in their battle against inflation, the Survey stated that the RBI’s support to growth will ensure adequate liquidity in the domestic financial market.
The Survey pointed out that aggressive supply of credit by the banking sector has as much been triggered by their improved financial health as that of the companies. Fiscal strength of banks has helped them make up for lower debt financing provided by corporate bonds and external commercial borrowings so far in FY23. “Rising yields on corporate bonds and higher interest/hedging costs on ECBs have made these instruments less attractive than the previous year,” it said.
Bank credit flow has remained broad-based and witnessed double-digit growth since the March quarter of FY22. Non-food bank credit grew 15.3% on year in December, against 9.4% a year before. Loans to MSMEs, especially, have risen by an average of 30.5% between January and November 2022, supported by the Rs 5-trillion Emergency Credit Line Guarantee Scheme.
Given the moderation in overseas issuances and lower investments by private equity and venture capital firms, the financing requirements of the corporate sector are being met through domestic resources. “As funds raised from the primary segment of domestic equity markets declined during FY23, reliance on bank credit for funding regular operations and capacity expansion increased,”the survey said. Moreover, the incremental credit-deposit ratio rose sharply both on an annual (122%) and half-yearly basis (172.5%; September 2022 over March 2022), it said.
Meanwhile, deposit accumulation over the past few years (especially in the wake of the pandemic) has enabled banks to fund the growing credit demand. Here, the well-capitalised banking system with a low bad loan ratio and more robust corporate sector fundamentals will continue to raise the flow of bank credit into productive investment opportunities, notwithstanding the rising interest rates.
The finances of the public sector banks have seen a significant turnaround, with profits being booked at regular intervals and their non-performing assets being fast-tracked for quicker resolution/liquidation by the Insolvency and Bankruptcy Board of India. At the same time, the government has been infusing adequate capital into state-run banks, ensuring that their ability to boost credit isn’t impaired, the Survey said.
The gross non-performing assets of commercial banks has fallen to a seven-year low of 5%, while the capital-to-risk weighted assets ratio (CRAR) remains healthy at 16% and well above the regulatory requirement of 11.5%. The health of shadow banks has continued to improve as well.
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The Survey highlighted that the increasing outreach of the banking sector and capital markets is reflected in the insurance and pension sectors. Insurance penetration in India has been steadily increasing, with life insurance penetration being above the emerging markets and global averages, it added. Stressing that India is poised to emerge as one of the fastest-growing insurance markets in the coming decade, it said: “Important government interventions and a conducive regulatory environment have supported the growth of the insurance market, which has seen increasing partnerships, product innovations, and vibrant distribution channels.”
The pension sector too has been taking rapid strides since the introduction of the National Pension Scheme (NPS), more recently, the Atal Pension Yojana (APY), it added.
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The change in the RBI’s policy stance this fiscal (it has hiked the repo rate by 225 basis points since May) led to a moderation of surplus liquidity conditions that prevailed during the pandemic years. Monetary policy transmission is well underway as lending and deposit rates increased following the hike in policy rates. Yields on G-secs were on an upward trajectory until June 2022 on concerns of high inflation and policy rate hikes before moderating in November and December, thanks to lower crude oil prices, a slower pace of rate hikes, and general moderation in global sovereign bond yields.