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Banks turning around on improved asset quality and capital base

Mumbai: The financial position of Indian banks is gradually strengthening, with consolidation of state-run lenders and revival of financing in the non-bank lending industry likely enhancing credit flows, a central bank report said Tuesday. But a demand slowdown and corporate de-leveraging have put a question mark on the pace of recovery.

“The decision regarding mergers of the PSBs announced by the government is likely to transform the face of the banking sector,’’ said the central bank report on Trends and Progress of Banking in India. “The banking sector is slowly turning around on the back of improvement in asset quality, strengthening capital base, and a return to profitability.’’

The central bank’s assessment of the banking sector comes amid a rise in risk aversion among lenders and a lack of funding opportunities for NBFCs due to default concerns. A combination of weak demand and reluctance among financial institutions led to economic growth falling to a six-year low.

“At this cusp, however, the evolving macro-economic scenario, and particularly the ongoing loss of pace in domestic economic activity, presents daunting challenges, as widespread risk aversion has turned credit demand anaemic even as corporations deleverage their own stressed balance sheets,” said the report.

As bad loans ate into banks’ capital, the government invested more than ₹2 lakh crore into lenders in the past few years to enable them to begin lending again. But many of the banks have turned cautious, and are reluctant to lend to projects, shifting instead their focus to retail clients buying homes and cars.

Furthermore, credit availability was limited as a big chunk of the market was not funded as NBFCs could not avail financing from mutual funds, which turned risk averse after the collapse of IL&FS and Dewan Housing Finance.

“Default and rating downgrades of a non-banking finance company and a housing finance company recently led to liquidity constraints and interruptions in their niche-centric financial intermediation,” the report said.

“The silver-lining is that although the lending activities of non-deposit taking systemically important NBFCs and HFCs have somewhat moderated, their loanloss provisions remain at comfortable levels.”

Although the government’s capital investments have pulled state-run banks from the abyss and helped some of them come out of the central bank’s prompt corrective action to set their finances and strategies right, the regulator believes they would be under scrutiny until they raise private capital.

Source: Economic Times