Economic Survey-Bad loans fall in FY19; capital inflows constrained

The performance of banking sector has improved as bad loans declined in the last fiscal, but financial flows are constrained due to fall in money raised from capital markets and stress in the non-banking financial sector, the Economic Survey said Thursday. "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 survey, which was presented by Finance Minister Nirmala Sitharaman in Parliament, said. Noting that the non-banking financial companies (NBFC) have experienced difficult times in the aftermath of the ratings downgrades and default of IL&FS Group, the survey said squeeze in the flow of resources to NBFCs has impacted the lending capacity of the sector in recent quarters.

However, it also pointed out that the government was quick to respond and took immediate measures to ring-fence the problem of severe liquidity crunch and limit the contagion. On the performance of public sector banks (PSBs), the segment witnessed improvement during 2018-19 and the gross NPA ratio decreased from 11.5 percent to 10.1 percent between March and December 2018.

The survey said growth in non-food bank credit (NFC), which remained sluggish in the last few years, showed improvement during the year. Bank credit to large industry and services segments mainly aided in overall NFC growth in 2018-19.

As per the survey, the eco-system for insolvency and bankruptcy is getting systematically built out. It has already led to recovery and resolution of a significant amount of distressed assets as well as palpably improved business culture.

Liquidity conditions, however, have remained systematically tight since September 2018, the survey added. On the issue of liquidity, it said the situation on average moved in the deficit zone in the last two quarters of 2018-19 as well as in the first quarter of 2019-20.

The tight liquidity has shown up in interest rates as well, it said, adding there were three key factors leading to liquidity tightening. "First, the growth of bank credit has improved in the 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 USD 32 billion in 2018-19 to smoothen exchange rate volatility," it added.

The currency in circulation increased by 22.6 percent in the last financial year, the survey said. "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 percent in 2018-19," it added.

The resource mobilization through the issuance of debt public issue rose significantly during 2018-19 as compared to the preceding fiscal, it said. However, there was a significant decrease in resource mobilization through public issue and rights issue of equity. During the year, Indian corporates preferred private placement route to gear up capital requirements, the survey said.

On the monetary policy front, there was a U-turn over the last year as 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, the survey said.