Industry surveys are an interesting way to know the sentiment in a particular sector. As a retail investor, a timely survey can give you cues to future prospects of businesses. The Federation of Indian Chambers of Commerce and Industry (FICCI) and the Indian Bankers’ association recently published the findings of the ninth round of the FICCI IBA survey. As many as 23 private, public sector and foreign banks participated in the survey conducted during January to June 2019.
Here are 4 key trends to note:
Reduction in NPA levels:
A non-performing asset (NPA) refers to a loan or an advance amount that is in default or on the verge of being in default, meaning that the principal or interest amount of the loan has not been paid for a period of 90 days or more. According to the FICCI IBA report, “the proportion of respondent banks citing a reduction in NPAs stood at 52% as against 43% in the previous round and 55% of reporting Public sector banks have cited a reduction in NPA levels.” This means that the number of bad loans has decreased which is a good sign for the banks and the economy. High NPAs reduce the profitability of banks and it also affects the confidence of investors, depositors and lenders. Loans advanced by banks are considered assets for the banks as it sustains capital by loan repayment. Non-repayment of loans makes it difficult to recycle funds and deploy credit. Thus, the financial stability of banks suffers, and this has a negative impact on the economy.
Change in credit standards:
Credit standards are the guidelines that a company or bank uses to determine whether to grant a loan or credit to an applicant. Credit standards may include factors like credit history, income and are created after analyzing past borrowers and prevailing market conditions to ensure that there are minimal chances of the borrower defaulting on a loan. When banks and financial institutions tighten credit standards, the rules for borrowing loans become stricter and it becomes difficult for businesses and individuals to avail credit. In the survey, 48% of respondent banks reported tightening of credit standards for large enterprises as against 64% in the last round indicating improvement in funding. Majority of respondent banks (78%) have reported no change in credit standards for small and medium enterprises (SMEs). Overall, this means that credit availability has improved in the period January to June.
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Demand for capital infusion in public sector banks:
The report stated that, “participating bankers were of the opinion that there should be capital infusion in public sector banks and measures should be taken to address the stress in the NBFC sector.” NBFC refers to non-banking financial companies which are registered under the Companies Act 1956 which carries out banking activities like granting loans, credits, acquisition of stocks equities debts etc. The NBGC sector in India is going through a crisis. Recently, NBFCs had borrowed short term from banks and mutual funds and couldn’t repay their lenders. Besides being a major problem for banks, these NBFCs have shortage of funds and this is causing a credit crunch in the economy. NBFCs have been a major source of credit for small and medium enterprises and individuals as well. When credit flow gets choked, consumption goes down and this stalls economic growth. This demand of bankers in the survey was recorded ed before the Union Budget. The budget included a proposal to infuse Rs 70,000 crore into public sector banks in a bid to ease the credit crisis.
Change in Marginal Cost of Lending Rates:
The report referred to the three successive rate cuts by the RBI. There has been an overall rate cut of 75 bps. “48% of the responding banks have reported a decrease in the MCLR during this period. However, the decrease in MCLR has been of 20 bps. Further, about 39% of the banks have also reported an increase in MCLR, with almost 23% reporting an increase of up to 20 bps.” MCLR is the marginal cost of lending rate. It is the minimum interest rate below which banks cannot lend. This parameter is used to determine the relative riskiness of the borrower and it varies for banks. Whenever the RBI changes the repo rate, banks have to change the MCLR accordingly. An increase in MCLR means as a borrower your interest payable will increase. When the MCLR decreases, loans may become cheaper depending on your bank. According to the survey results, 54% of the public sector banks have decreased their MCLR and 50% of the responding private banks have increased their MCLR.
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One related number : 73%
According to 73% of respondents in the survey, the infrastructure sector has the highest volume of NPAs. On a positive note, 63% of the survey participants reported a decline in NPAs in this sector during the last six months. In terms of credit expectation and outlook, infrastructure again leads the chart with 71% of the respondents saying they expect the maximum long term credit growth in this sector.
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