Banks turning wary of large exposures mainly due to NPA fear: FICCI-IBA survey

New Delhi: The tenth round of the FICCI-IBA survey was carried out for the period July to December 2019. A total of 18 banks consisting of public sector, private sector and foreign banks participated in the survey. These banks together represent about 50% of the banking industry, as classified by asset size.

The 10th FICCI-IBA survey asked bankers about their views on the measures that would help to improve the economic situation. Banks are of the view that rural distress should be addressed through laying emphasis on rural infrastructure development and stimulating demand by increasing the pace of fund transfers under the PM-Kisan and MGNREGA schemes. Some of the respondent banks also suggested that the government could undertake structural land and labour reforms, while taking measures to increase job creation in the country. A large number of participating bankers have mentioned that addressing the taxation issues by launching GST 2.0 regime and bringing a direct income tax code should be the top priority of the government at this moment.

The participating bankers also shared their views on ways to increase the flow of funds to the MSME sector which forms a crucial constituent of our economy. These include suggestions including capacity building of MSMEs through various training programs, development of an online platform to help banks accelerate the SME lending process, development of creative ways of credit assessment like using psychometric testing, cash flow estimates or Qualitative Credit Assessment (QCA) and keeping NPA of this sector under check through measures like reclassification of IRAC norms for MSMEs, proper due diligence, regular follow up, strict monitoring of the end-use of funds, etc.

In the current round of Bankers’ survey, a relatively lower proportion of responding banks have reported a decline in the level of NPAs. As compared to the first half of 2019 in which nearly 52% of the respondents had reported a decline in the NPA levels, the proportion of respondent banks citing a reduction in NPAs in the current round of survey has reduced to 39%. The proportion of respondent banks reporting a rise in the NPA levels on the other hand has shown slight increase to 28% as against 26% in the preceding survey.

Amongst the key sectors with high level of NPAs such as Infrastructure, Metals and Iron & Steel, Engineering Goods and Textiles, higher proportion of respondent bankers have indicated high levels of NPAs in these sectors. For instance, while about 73% and 55% of the respondents mentioned Infrastructure and Metals, Iron & Steel as sectors with high level of NPAs respectively in the last survey round, the proportion of respondents saying so have increased to 93% and 60% in the current round of survey. Amongst the respondents stating infrastructure as high NPA sector, about 36% of these respondents have reported an increase in NPA in this sector during July- December 2019 period.

The survey also shows that there has been a decrease in the MCLR, with about 11% of the respondents having reported a reduction in the MCLR by more than 50 bps, 28% of the respondents reported reduction by 40-50 bps, 17% of the respondents reduced MCLR by 30-40 bps, another 17% reduced it by 20-30 bps and 22% reduced it by 0-20 bps.

In case of term deposits above one year, 67% of the responding banks have decreased interest rates by upto 50 bps while 28% have decreased the rates by more than 50 bps. For term deposits below one year, majority respondents (67%) have reduced the interest rates, while 28% have kept the interest rate unchanged.

With a view to allow faster transmission of rate cuts to consumers, the RBI has made it mandatory for banks to link all retail and SME loans to an external benchmark effective from October 1, 2019. Most of the banks have adopted repo rate as the EBLR. During October-December 2019, the WALRs of domestic (public and private sector) banks on fresh rupee loans declined by 18 bps for housing loans, 87 bps for vehicle loans and 23 bps for loans to micro, small and medium enterprises (MSMEs). Overall the transmission through EBLR is encouraging. In the current round of survey, Bankers were asked to share their views about the response of customers regarding migrating to EBLR from MCLR and the measures that the banks have taken to enable this shift. Majority of banks reported positive response of borrowers towards shift to EBLR as they find EBLR linked rate of interest more attractive. Banks have taken wide scale publicity measures to create awareness about the EBLR. Banks are also offering easier switching process for conversion of loans from MCLR to EBLR.

In terms of the composition of loans and advances, the share of corporate loans of banks has increased to 58% as against 55% in the last round. Consecutively, the share of retail loans has reduced from 42% as against 45% in the preceding round.

Bankers were also asked about their views and experience on the co-lending model of lending between banks and NBFCs permitted by RBI. Majority of the respondent banks reported that the model is in early stages of implementation and hence has not yet led to any significant improvement in the credit flows to the priority sector. Some responding banks also reported that there are certain challenges with the model which has restricted its take off at the desired level. For instance banks follow concept of guarantor in MSME loans whereas NBFCs prefer concept of co-borrower, difference in CGTMSE coverage norms of banks and NBFCs, different criteria of loan assessment followed by banks and NBFCs and difference in method of interest calculation of banks and NBFCs, and integration of systems of both the bank and NBFCs.

About the Survey

Federation of Indian Chambers of Commerce & Industry (FICCI) and Indian Banks’ Association (IBA) conduct a Survey of Bankers twice every year. The survey gives an outlook on the status of the Indian Banking Sector, highlighting key operational and financial indicators of the banks. It also includes the expectation from bankers on some of the important financial and regulatory policy measures which are being undertaken by the Government and the Reserve bank of India (RBI).