Performance of the banking system improved as NPA ratios declined and credit growth accelerated

Eco-system for insolvency and bankruptcy getting systematically built out, leading to recovery and resolution of significant amount of distressed assets

The Economic Survey 2018-19 states that the monetary policy witnessed a U-turn over the last year. The benchmark policy rate was first hiked by 50 basis points (bps) and later reduced by 75 bps due to weaker than anticipated inflation, growth slowdown and softer international monetary conditions. Liquidity conditions, however, have remained systematically tight since September 2018. The Survey was tabled by Union Minister for Finance and Corporate Affairs, Smt. Nirmala Sitharaman in the Parliament today.

The performance of the banking system has improved as Non- Performing Asset (NPA) ratios declined and credit growth accelerated. However, financial flows to the economy remained constrained because of decline in the amount of equity finance raised from capital markets and stress in Non-Banking Financial Companies (NBFC) Sector. The eco-system for insolvency and bankruptcy is getting systematically built out. It has already led to recovery and resolution of significant amount of distressed assets as well as palpably improved business culture.

The Economic Survey states that during 2018-19, the growth rate of monetary aggregates reverted to their long term trend. The currency in circulation increased by 22.6% in the last financial year. Increase in net RBI credit was mainly from the recourse to open market operations undertaken during the year.  Deposits with the banking system, both demand and time, recorded acceleration in their growth, leading to an increase in aggregate deposits by 9.6% in 2018-19.

On the issue of liquidity, the economic survey states that the liquidity situation on average moved in the deficit zone in the last two quarters of 2018-19 as well as in first quarter of 2019-20.  The tight liquidity has shown up in interest rates as well. There were three key factors leading to liquidity tightening. First the growth of bank credit has improved in last two quarters of 2018-19, however growth in bank deposits remained tepid. The growth in currency in circulation also accelerated. Most significantly the RBI had to draw down its foreign reserves in excess of $ 32 billion in 2018-19 to smoothen exchange rate volatility. The RBI responded to solve this issue by infusing liquidity through means. During the year the 10-year  benchmark g-sec were volatile.

The Survey says that performance of the banking sector, Public Sector banks in particular, improved in 2018-19. The Gross NPA ratio of Scheduled Commercial Banks decreased from 11.5% to10.1%  between march 2018 and December 2018. Growth in Non-food Bank Credit (NFC), which remained sluggish in last few years, showed improvement in 2018-19. Bank credit to large Industry and services segments were the main drivers of overall NFC growth in 2018-19. However the pace of credit growth has moderated in last few months.

Non-Banking Financial Companies (NBFC) experienced difficult times in the aftermath of the ratings downgrades and default of IL&FS Group. As NBFCs faced severe liquidity crunch, the government moved in quickly and took immediate measures to ringfence the problem and limit contagion. Squeeze in flow of resources to NBFCs has impacted the lending capacity of the sector in recent quarters.

The Economic Survey states that resource mobilization through issuance of debt public issue rose quite significantly during 2018-19 as compared to previous year. However there was a significant decrease in resource mobilization through public issue and rights issue of equity. During 2018-19, Indian Corporates preferred private placement route to gear up capital requirements. The cumulative net assets under management of all Mutual Funds increased by11.4% to ₹ 23,79,584 Crore. There was a net outflow of ₹ 5,499 Crore by Foreign Portfolio Investors in 2018-19. During the fiscal 2017-18 the gross direct premium of General Insurers (within India) was ₹ 1,50,660 Crores registering 17.6% annual growth.

The Economic Survey states that the ecosystem for insolvency and bankruptcy is getting systematically built out with recovery and resolution of significant amount of distressed assets as well as palpably improved business culture. Till March 31, 2019, the Corporate Insolvency Resolution Process yielded a resolution of 94 cases which has resulted in the settlement of claims of  ₹ 1,73,359 crore. Moreover, as on 28 Feb 2019, 6079 cases involving a total amount of ₹ 2.84 lakh crores have been withdrawn before admission under provisions of IBC. Further, as per RBI reports, ₹ 50,000 crore has been received by banks from previously non-performing accounts.  RBI also reports that additional ₹ 50,000 crore has been "upgraded" from non-standard to standard assets. All these shows behavioural change for the wider lending ecosystem even before entering the IBC process.

Insolvency and bankruptcy ecosystem strengthens, enabling corporate debt resolution and asset recovery that supports banking sector stability. The banking system saw reduced gross NPAs and accelerated non food credit, while tight liquidity-driven by faster credit, tepid deposit growth, higher currency in circulation and reserve drawdowns-prompted central bank liquidity operations. NBFC stress following major defaults constrained lending, prompting government ringfencing measures. A functioning insolvency and bankruptcy ecosystem produced multiple corporate resolution outcomes, pre admission withdrawals and recoveries/upgrades of previously non performing assets, influencing corporates' shift toward debt issuance and private placements.