RBI says bank funding can’t be substituted

RBI says bank funding can’t be substituted

Context

• Banks are increasingly retrenching credits whereas mutual funds, non-banking finance companies (NBFCs) are continuously offsetting the retrenchment effect.
• Does this implies that role and relevance of Bank funding in on decrease?

What is the Issue?

• Retrenchment of credit by public sector banks is partly offset by NBFC’s, mutual funds and capital markets. They are meeting companies debt needs quite extensively
• Apparently it might look like that NBFCs, mutual funds and capital markets in unison has become a perfect substitute of public sector lending
• But the Reserve Bank of India (RBI) in its Biannual Fiancial Stability Report said that such alternative sources of funding cannot replace bank loans

Explanatory Facts

• Banks’ share in the flow of credit, which was about 50% in 2015-16, declined sharply to 38% in 2016-17.
• But in spite of this, aggregate share of flow of capital to the commercial sector was not affected.
• During 2016-17, while deposit growth of scheduled commercial banks picked up, credit growth remained sluggish, putting pressure on net interest income (NII), particularly of the public sector banks (PSBs)
• While profitability ratios of such banks showed a marginal increase, public sector banks continued to show a negative return on assets (RoA).
• A striking feature is that while gross NPAs of the banking sector had increased in March 2017 compared with September 2016, overall stress declined due to reduction in restructured standard advances.
• Gross non-performing advances (GNPAs) ratio of all banks rose from 9.2% in September 2016 to 9.6% in March 2017.
• During the same period, the stressed advances ratio declined from 12.3% to 12% due to a fall in restructured standard advances. This was seen in agriculture and retail sector.
• However, the stressed advanced ratio in the industry sector increased.

Cause

• There has been a sharp increase in private placements of debt by non-financial entities and net issuance of commercial papers (CPs).
• The aggregate share of these two in total credit flow to commercial sector increased to 24.3% in 2016-17
• Apart from that, there is an increasing intermediation of credit by mutual funds

Way Forward

• Steps to restore the health of the banks is an urgent need right now
• Banking sector needs immediate structural reforms
• Impending NPAs is a huge crisis that the banking sector is dealing with. Solvinng the NPA crisis is a necessary condition
• Banks will have to be more prudent and conscious with regard to their lending terms so that the sector can avoid the massive scale default payments that it is currently witnessing