Looking ahead with hope

V P Nandakumar,

MD & CEO, Manappuram Finance Ltd

The recently released Financial Stability Report (FSR) of the Reserve Bank of India (RBI) shows the resilience of the banking sector in general and NBFCs in particular

India’s financial sector comprising of both Scheduled Commercial Banks (SCBs) and Non-Banking Financial Companies (NBFCs) have shown remarkable resilience in weathering the pandemic-induced storm in the credit market and the spill-over effects stemming from the global financial aftershocks of jumbo rate hikes by major central banks to tame elevated inflation. Equal credit for such a happy tiding in the fortunes of the financial market should go to the tight-fisted regulation by the Reserve Bank of India (RBI) and the self-discipline being shown by the industry players who carefully avoided unwanted ebullience. More importantly, most players in the financial industry passed the stringent stress test done by the RBI, though some pockets of concerns still persist.

While the apex bank kept an `Arjuna’ eye on the financial sector’s lending practices and capital buffers, the industry on its part has left no stones unturned in its ongoing efforts to improve the asset quality and reducing sticky or non-performing assets (NPAs). Such an achievement is a rare feat indeed considering the macro-headwinds that have swept the financial firmament for the past two to three years; first by the Covid-19 pandemic and second by the pivot by major central banks to a tighter monetary policy leading to liquidity normalisation and higher interest rates.

The latest Financial Stability Report (FSR) published by the RBI lends enough credence to the remarkable resilience of the Indian financial sector. “The Indian financial sector has remained resilient building on the consolidation of the banking sector’s balance sheet, the ongoing reduction in bad loans and the buffering of risk absorbing capacity. Macro stress tests indicate that all banks would meet the regulatory minimum capital requirements even in a severe stress scenario. Stress tests indicate that some non-banking financial companies may be vulnerable to liquidity shocks. Contagion risks and consequent additional solvency losses remain limited,” the report says.

“The combination of regulatory measures undertaken to cushion banks since the onset of the pandemic and banks’ own efforts in augmenting their capital base and reducing non-performing loans appear to have fortified their balance sheets. A fresh lending cycle underway since H2:2021-22 gained further traction during H1:2022-23 as credit growth reached double digits and became broad based across sectors. Banks have managed their exposure to large borrowers well, with granularisation of loan books and reduction in asset impairment,” the FSR goes on to add.

This assumes significance in the wake of RBI’s plan to introduce new loan provisioning based on the concept of Expected Credit Loss (ECL). Though still a work in progress, switching over to ECL based provisioning may require building additional risk buffers by some banks and non-banks. As things stand now, they may be able to do it without much trouble since capital markets remain buoyant.

Also, there is a steady improvement in the earning visibility and profitability of the industry at a systemic level which deserves special mention against the backdrop of rising interest rate scenario. “At the system level, the net interest margin (NIM) witnessed an improvement of 20 bps between September 2021 and September 2022, reflecting a faster rate of increase in loan rates vis-à-vis deposit rates in a rising interest rate scenario as well,” the report says. This means that the financial sector has managed rate transmission in both credit and deposit markets dexterously or in other words they are `banking on rates’ in an efficient manner.

It should also be mentioned that NBFCs, as a whole, were the largest net borrowers of funds from the financial system, with gross payables of Rs 13.22 lakh crore and gross receivables of Rs 1.93 lakh crore as at end-September 2022. “Over half of their borrowings were from SCBs and this share remained stable during Q2:2022-23 as their reliance on funding from AMC-MFs continued to reduce. Instrument wise, the NBFC funding mix saw a marginal rise in LT loans and LT debt instruments whereas the share of CPs declined during Q2:2022-23”. This diversification of sources of funding is important for NBFCs to dial down their dependence on a single source for funds.

“Keeping pace with the underlying momentum of domestic economic activity, financial sector entities have engaged in active intermediation to support the demand for funds. Lending has moved to a higher trajectory and has become broad based. Capital positions remain strong. The asset quality of banks and NBFCs has improved further. Macro stress tests indicate that SCBs can withstand moderate to severe adverse macroeconomic circumstances without significant capital impairment,” the FSR says.

On the balance, domestic financial players have sailed through turbulent periods of pandemic, high inflation and elevated interest rates with remarkable resilience. And going by the findings of the RBI report, they will continue to improve their performance in terms of asset quality, earning visibility and profitability ratios going forward. Therefore, 2023 may well play out as a banner year for the financial sector though some pockets of concerns still remain.

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