Tuesday, Oct 12, 2021 07:30 [IST]

Last Update: Tuesday, Oct 12, 2021 01:57 [IST]

Breaking the Hurdles

SATISH SINGH

Global rating agency Moody has upgraded the ratings of 9 Indian private and public sector banks from “Negative Outlook” to “Stable Outlook”. “Negative Outlook” means credit ratings of medium & long-term loan accounts are lower levels, whereas, “Stable Outlook” says that credit ratings of loans are stable and will stay at same level. Banks whose ratings have been upgraded by Moody including Axis Bank, HDFC Bank, ICICI Bank, Bank of Baroda, Canara Bank, Punjab National Bank, Exim Bank and Union Bank of India. Moody has also upgraded India's sovereign from “Negative” to “Stable” just a day before the banks' rating upgrade.
Rating upgradation of India and Indian banks by Moody means that the risks associated with the Indian economy and Indian banks are reducing. This is also true, as there has been a tremendous jump in the Gross Domestic Product (GDP) in the first quarter of the current financial year due to continuous improvement on the economic fronts, investment level in India has significantly increased in recent time, fiscal deficit is coming down due to pick up in revenue collection as well as with the increase in capital expenditure, economic activities are accelerating. After the formation of a bad bank too, the possibility of a reduction in bad loans has increased.
Moody also believes that due to the improvement in the Indian economy, India's fiscal deficit is gradually coming down. The Goods and Service Tax (GST) collection has seen a significant jump in the last few months. For the last few months, the GST collection is getting more than one lakh crore every month. In the month of September also, the GST collection has been more than one lakh crore rupees.
Due to the huge increase in bad loans, the Reserve Bank of India had put many public sector banks in the category of prompt corrective action (PCA) a few months back. In this category, the central bank puts banks only when banks are facing severe financial crisis. Banks which are kept in this category, they cannot do branch expansion or increase their advance level. Apart from this, many other restrictions are also imposed on PCA category banks.
The quality of large accounts of banks is also improving. The government has recently solved many problems related to the banking sector. Under these reforms, public sector banks are being consolidated, privatized & recapitalized. The implementation of the Insolvency and Bankruptcy Code (IBC) has accelerated the resolution of bad debts. In the last 4 years, out of Rs.4.56 lakh crore earmarked by the Reserve Bank of India for the process of IBC, banks have recovered 28 percent i.e., Rs.1.3 lakh crore, which shows the relevance of IBC. According to Moody, if economic activity picks up or will stay at the same level, then the chances of resolving bad loans of banks will increase and their recovery will be accelerated as well as the quality of credit accounts will also improve.
Despite the Corona pandemic, the performance of public sector banks has improved, which indicates increasing strength of the banking sector. By March 2021, the bad loan of scheduled commercial banks had come down by Rs.61180 crore to Rs.8.34 lakh crore, as against Rs.8.96 lakh crore in March 2020. In March 2021, the Gross Bad Loan (GNPA) of banks was 7.5 percent of total advances, while the net bad loan was 2.4 percent. This shows that the banks performed well during the corona pandemic, while the Indian economy is still struggling to come out of the crisis caused by the corona pandemic.
According to the latest Financial Stability Report of the Reserve Bank of India, the GNPA of banks can be 9.80 percent by March 2022. If the situation worsens, it can reach the level of 11.22 percent. GNPAs of listed banks stood at Rs.8.11 lakh crore in June 2021 and declined by 2.5 percent over the previous year, as compared to Rs.8.32 lakh crore in June 2020. Public sector banks performed better than private banks on this parameter. Their GNPA declined by 4.2 percent, while that of private sector banks rose by 3.3 percent. The net bad loan of public sector banks declined by 4 per cent during this period, while the net bad loan of private sector banks grew at the rate of 22 percent. Almost all public sector banks have performed well in the first quarter of the current financial year as well. During this period, the collective net profit of listed banks grew by 61 percent year-on-year basis, while the net profit of public sector banks grew by 140 percent year-on-year to Rs.14,012 crore from Rs.5,847 crore. At the same time, the net profit of private sector banks increased by 28 percent to Rs.18,083 crore from Rs.14,127 crore. In the area of operating profit also, the performance of public sector banks has been better. Their operating profit grew 16 percent, nearly doubling that of private banks.
At present, adequate liquidity remain in the market and banks also have sufficient capital to disburse loans, therefore, the Reserve Bank of India has again kept repo rate & reverse repo rate at 4.00 percent and at 3.35 percent consecutively in the monetary review which had held on October 8, 2021. This is continuously 9th time when the central bank has kept policy rate unchanged. The status quo is maintained since May 2020.
In the month of March 2020, due to the corona pandemic in India, there was a nationwide lockdown, due to which the Indian economy was devastated, but now it is slowly improving. Even though the economy is improving, the demand for credit has still not picked up and remains at around 6 percent, but as the economy recovers; Businessmen will start taking loans to increase their business. In this backdrop, the banks are also anticipating double-digit growth in credit offtake by the end of the current financial year.
The months of October, November and December of the year are full of festivals and in these months everyone's business increases. The demand for retail loans is increasing incessantly during Durga Puja. There has been a phenomenal growth in the credit card business in this season. Second, there is a steady increase in retail loans as well. Here, the possibility of the arrival of the third wave of the corona pandemic is waning, which is also increasing the hope of speeding up the economy. The improvement in GDP also confirms this truth.
In the changing economic and banking scenario; There is unceasing improvement on the economic and banking fronts. On the one hand, revenue collection is accelerating & due to slew of other corrective measures adopted by the government, the Indian economy is coming back to track and on the other hand owing to formation of bad banks recently & continuing other reforms in banking sector have created positive milieu for the banking sector. Keeping in view the current remedial activities, Moody has lately upgraded the rating of 9 banks and India. If the pace of recovery in the economy and the banking sector remains at current pace, then soon Moody may again be forced to think about upgrading the rating of India and Indian banks.
(Satish Singh is a Senior Columnist. The views expressed are personal opinion of the Author. Mr. Singh can be reached through satish5249@gmail.com).

Sikkim at a Glance

  • Area: 7096 Sq Kms
  • Capital: Gangtok
  • Altitude: 5,840 ft
  • Population: 6.10 Lakhs
  • Topography: Hilly terrain elevation from 600 to over 28,509 ft above sea level
  • Climate:
  • Summer: Min- 13°C - Max 21°C
  • Winter: Min- 0.48°C - Max 13°C
  • Rainfall: 325 cms per annum
  • Language Spoken: Nepali, Bhutia, Lepcha, Tibetan, English, Hindi