The eighth round of the FICCI-IBA survey for the period July to December 2018 witnessed the participation of 23 banks including public sector, private sector, foreign and small finance banks. These banks together represent over 65% of the banking industry, as classified by asset size.

The second half of 2018 witnessed considerable liquidity constraints owing to various factors including some Public Sector Banks under PCA framework, stress in the NBFC sector, as also due to expansion of currency in circulation in quarter 3 of the fiscal year - fueled by wedding season, festivals, forex interventions following higher oil prices and FPI outflows, and tax outflows.

A majority of respondent banks mentioned that the liquidity scenario in quarter three of current fiscal year has remained in deficit and though it has slightly improved off-late, but liquidity could remain tight even in quarter four, owing to year end liquidity demands, tax outflows, higher fiscal deficit and run-up to elections. Respondent banks agreed that RBI has taken adequate measures, by way of Open Market Operations (OMO) to maintain liquidity and suggested that RBI should continue OMO purchases for remaining period of the fiscal year as well. Participating bankers also suggested cutting of CRR by the RBI to bring more liquidity in the market to support growth. Other suggestions included greater capital infusion by government in PSBs, relaxation of PCA norms and allowing a special liquidity window for NBFCs.

Another key finding of the survey has been the changing trend in NPAs. In contrast to last few rounds of surveys, majority (54%) of reporting Public sector banks have cited a reduction in NPA levels, with only 38% citing an increase. Furthermore, in the current round of survey, none of the respondent banks have cited an increase in the requests for restructuring of advances. While 39% have stated a fall in number of such requests, 61% have reported no change in the number of such requests.

While infrastructure continues to remain the key sector with high NPAs, with over 90% of respondents citing so, however 37% of such respondents have reported a reduction in NPAs of the sector during the period July to Dec 2018 and 42% of these respondents have reported an increase in NPAs as against 79% citing an increase in the preceding round of survey.

Participating bankers mentioned that they have had a positive experience in recoveries since the implementation of Insolvency and Bankruptcy Code (IBC). However, it has been highlighted that the resolution process is being delayed owing to limited infrastructure in NCLT and rising cases of appeals. Banks therefore suggested that there is a need to improve the capacity by increasing staff and establishing more NCLT benches across the States. Also, there is a need to introduce some mechanism to reduce unwanted litigations; consider introducing provisions like DRT wherein a percentage of the loan outstanding is insisted while filing an appeal. This will ensure speedy resolution of genuine cases.

The respondent bankers were also of the view that the recent recapitalization plan of the government will further help in improving the balance sheets of public sector banks and help them write-off some of their current bad loans. According to them, capital infusion comes at a time when NPAs are declining and recoveries are improving. This is expected to improve financial health of PSBs, bring out some PSBs from the PCA framework and facilitate overall economic growth. It will help banks to extend fresh credit and thus support credit growth, especially for small and micro industries.

Going forward, participating bankers believe that sectors with high credit growth will be infrastructure, cement, metals, chemicals, food processing, NBFCs and Engineering goods.

In 2018, RBI hiked repo rate twice - by 25 bps in June 2018 and by another 25 bps in Aug 2018. As per the findings of the survey, 8.7% respondents increased the MCLR by 40-50 basis points, 17.4% increased it by 30-40 bps, 26% participants increased the MCLR by 20-30 bps and over half of the respondents (55%) have increased the MCLR by up to 20bps. Over 91% respondents have increased the lending rate during the period July to Dec 2018.

In case of term deposits (TD), 52% reported an increase for TD below one year, and 83% reported increase for TD above one year. However, for both types of term deposits, majority respondent who have increased the rates have done so upto 50 bps.

In the 5th bi-monthly monetary policy, RBI has indicated that from 1st April 2019, all new floating rate personal/ retail loans and floating rate loans to MSMEs shall be benchmarked against an external benchmark. Though the respondents have some considerations over such a move, they have more concern on the challenges. Respondent bankers anticipated that such linkage with external benchmarks will bring volatility in interest rates, because of which there could be frequent changes in customers??? monthly installments, which are not appealing to the customers. Additionally, spreads kept by banks could be higher, to protect themselves adequately in case of high volatility of the benchmarks.

Another finding of the survey is the increase in share of CASA deposits during the second half of 2018. The number of respondents reporting an increase in share of CASA deposits rose to 78% in the current round of survey as against 68% reported in the last round. However, a large majority indicated only a moderate rise, with only 4% indicating a substantial rise. A few public sector banks reporting an increase in share of CASA deposits indicated that the rise in share has been due to conscious effort of banks to reduce the cost of deposits and also to have some additional resources as banks depend largely on deposits for their lending activities.

Likewise, there has been an increase in share of retail loans vis-a-vis corporate loans, as per the findings of the current round of survey. While in the immediately preceding round of survey, retail loans comprised 40% and corporate loans 60%, in the current round the ratio has changed to 45% share of retail loans and 55% corporate loans.