Bank credit grown steadily, SCBs seeing constant improvement in profitability: Economic Survey

Bank credit has grown at a steady rate in the current financial year and there has been a consistent improvement in the profitability of Scheduled Commercial Banks (SCBs) as reflected in a fall in gross non-performing assets (GNPAs) accompanied by a rise in the capital-to-risk weighted asset ratio (CRAR) according to the Economic Survey 2024-25 which was tabled by Union Minister of Finance and Corporate Affairs, Nirmala Sitaraman in the Parliament on Friday (January 21, 2025). 

GNPA ratio of SCBs has declined consistently from its peak in FY18 to a 12-year low of 2.6% at the end of September 2024 and lower slippages and a reduction in outstanding GNPAs through recoveries, upgradations, and write-offs have led to this decrease, the Economic Surrey has highlighted. 

“Lower GNPAs and higher provisions accumulated in recent years also contributed to a decline in net NPAs at around 0.6% at the end of September 2024. Improvements in asset quality parameters were observed across all major bank groups,” it stated. 

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Emphasising that all major bank groups reported a decrease in this ratio, the Survey stated that CRAR of SCBs has increased in the post-asset quality review period, which was conducted from August to November 2015. 

For FY24, around 93% of the increase in the capital funds was contributed by the rise in Tier-I capital of banks, indicative of the robustness of capital buffers, it stated.

At the end of September 2024, the CRAR of SCBs stood at 16.7%, and all banks met the Common Equity Tier-1 (CET-1) requirement of 8%. The profitability of SCBs improved during H1 of FY25, with profit after tax (PAT) surging by 22.2% (YoY). The cost of funds rose in sync with the tightening monetary policy cycle, it has mentioned. 

As per the Survey during Q2 of FY25, the cost of funds increased marginally for SCBs. As the transmission was faster for lending rates relative to deposit rates, the overall yield on assets remained broadly stable during the last year and the net interest margin (NIM) has marginally declined across all bank groups, it pointed out.

“Despite a contraction in NIM, both return on equity (RoE) and return on assets (RoA) ratios improved in September 2024. Further, as the GNPAs and slippages declined, the provision coverage ratio improved further to 77% at the end of September 2024 from 74.9% in March 2023,” it stated. 

Despite the monetary policy tightening cycle in India, bank deposits continue to exhibit double-digit growth. However, their profile has gradually shifted towards schemes offering higher returns. Growth in term deposits continues to outpace the current and savings account deposit growth, the Survey has found. 

“As of the end of November 2024, the YoY growth in aggregate deposits of SCBs stood at 11.1%. The growth in bank credit has started converging towards deposit growth,” it stated.

Stating that at the end of November 2024, the growth in overall bank credit moderated to 11.8% (YoY) from 15.2% a year ago over the same period, the Survey pointed out that the growth in overall bank credit up to 27 December 2024 in the current financial year moderated to 7.7%.

“In the current financial year, up to 27 December 2024, the growth rate in non-food credit has been 7.5% compared to a growth of 11 per cent over the same period last year. The moderation in credit growth can be attributed to an increase in lending rates (as a result of monetary policy transmission of higher policy rates to higher lending rates) and the imposition of increased capital requirements for unsecured personal loans, credit cards and lending to Non-Banking Financial Companies (NBFCs) by the RBI,” it stated.

Sector-wise, the growth in agriculture credit as of 29 November 2024 in the current financial year was 5.1%. The growth in industrial credit picked up and stood at 4.4% as of the end of November 2024, higher than 3.2% recorded a year ago, according to the Survey.

Across industries, bank credit to micro, small, and medium enterprises (MSMEs) have been growing faster than credit disbursal to large enterprises. As of the end of November 2024, credit to MSMEs registered a YoY growth of 13%, whereas it stood at 6.1% for large enterprises, it stated. 

Credit growth to the services and personal loans segments also moderated to 5.9% and 8.8%, respectively, as of the end of November 2024 in the current financial year. Amongst the services sector, the moderation has been driven by a slowdown in credit disbursal to NBFCs. 

Vehicle and housing loans drove the moderation in the personal loans segment. In terms of increasing risk weights to NBFCs and credit cards, RBI’s policy interventions contributed to the moderation of credit growth in those segments, as per the Survey.

“Although pockets of stress have appeared lately, as we shall see later, India’s credit landscape highlights the recovery in the credit environment from the crisis of the second decade, now trying to consolidate itself,” it stated. 

“At the heart of this growth lies a strong policy emphasis on financial inclusion, as reflected in the significant rise in RBI’s Financial Inclusion Index from 53.9 in March 2021 to 64.2 by March 2024,” it concluded.