Banks’ robust health sets stage for decade’s next credit boom: FinMin

The Finance Ministry said on Monday that the slew of measures undertaken over the past decade, including recapitalisation of banks and enabling the restructuring of industry, have positioned the economy for the next round of credit and investment growth this decade.

“With stronger balance sheets in the non-financial corporate and banking sectors, growth in investments and credit are poised to increase in this decade, as is already evident in the data for the last three years,” said a new report titled ‘The Indian Economy: A Review’, released by the Department of Economic Affairs (DEA) in the Finance Ministry.

With numerous investment-boosting reforms and healthier balance sheets, private corporate investment has begun to crowd in, and banks are responding with greater credit disbursement, said the DEA report.

From the recapitalisation and merger of Public Sector Banks (PSBs) and amendment of the SARFAESI Act 2002 to enacting the Insolvency and Bankruptcy Code 2016 (IBC), these reforms have helped clean up the balance sheets of banks and corporates, it added.

The government and the RBI have ensured that the “twin balance sheet problem” of corporates and banks have converted into “twin balance sheet advantage”.

The non-food bank credit growth, net of personal loans, which had declined from above 20 per cent in 2008 to less than 10 per cent in FY16, has rebounded to reach 13 per cent in FY23, said the DEA report. 

The government’s move to focus on capex led growth strategy has paid rich dividends for the economy. Effectively, the capital expenditure of the public sector (including Union government capex, grants to the states for capital asset creation, and investment resources of the Central PSEs) has increased from ₹5.6-lakh crore in FY15 to ₹18.6-lakh crore in FY24, it highlighted.

infra projects

The Centre has built infrastructure at a historically unprecedented rate, and it has taken the overall public sector capital investment from ₹5.6-lakh crore in FY15 to ₹18.6-lakh crore in FY24, according to Budget estimates. “That is a rise of 3.3X. Whether the total length of highways, freight corridors, number of airports, metro rail networks or the trans-sea link, the ramp up of physical and digital infrastructure in the last ten years is real, tangible and transformative,” said V Nageswaran, Chief Economic Advisor in the Finance Ministry, in the DEA report.

Bank credit, in recent years, has shown phenomenal growth, outpacing the growth in deposits on the back of sustained demand momentum and robust economic recovery after the Covid19 pandemic. 

The growth in non-food bank credit at 15 percent in FY23 was the highest in the last ten years. This wouldn’t have been possible without a significant improvement in the banking sector’s health, the DEA report said.

Even as credit growth surged, asset quality across all scheduled commercial banks groups kept improving with GNPAs and net NPAs, relative to the total advances, dropping to a multi year low in September 2023 .

“The government’s recent emphasis on capital expenditure has further strengthened the credit cycle, as seen in the growing bank credit disbursal to the infrastructure sector. Between FY19 and FY24 (as of November 17,2023), bank credit to infrastructure sector registered CAGR of 4.2 percent”, the report added.

The credit outstanding to the infrastructure has been consistently above ₹ 10 lakh crore  in each of the years between FY19 and FY23 and already touched ₹ 12 lakh crore as of November 17, 2023.

Meanwhile, alongside banks, the overall non banking finance companies (NBFCs) credit expansion has been strong, in fact, stronger than growth in bank credit, driven by a marked improvement in their asset quality, capital levels and liquidity, it added.

A series of measures have been implemented to strengthen NBFCs and they have played an important role, the DEA report said.