RBI to review credit flow, asset quality of banks

According to the RBI data on domestic operations, state-run banks' gross bad loans dropped to 8.18% of gross advances by December 2021 from 9.36% as of March 2021.

Days after the Reserve Bank of India (RBI) hiked the repo rate for the first time in almost four years, governor Shaktikanta Das will meet chiefs of public sector banks (PSBs) on May 17 to review credit flow and assess the outlook on asset quality, sources told FE. Das may also take stock of state-run banks' strategy to deal with the rising interest rate scenario without upsetting growth dynamics, they added.

The meeting comes amid apprehensions that the central bank may be forced to go for another round of aggressive rate increase and liquidity-tightening measures to contain runaway retail inflation, which hit a 95-month high in April. On May 4, the Monetary Policy Committee (RBI) resorted to an out-of-cycle repo rate hike by 40 basis points, the sharpest increase in nearly 11 years, to 4.4%.

The governor will also review the state-run banks' collection efficiencies, consumer grievance redress mechanism, digital banking units, lending to government entities, IT infrastructure and cyber security framework and any other issue that the lenders may like to present, said the sources.

"PSBs are preparing presentations on various aspects of their operations. The governor would probably like to have bankers' feedback as to how they are planning to cope with the new reality of elevated interest rates and tight liquidity conditions, and what could be the impact on banks' lending, asset quality and the broader operating environment," a banking source said.

Another source said digital banking units is likely to feature prominently in the discussion and the RBI may review the banks' preparedness to roll them out ahead of the Independence Day.

Moreover, discussion on asset quality assumes significance, as certain special dispensations extended by the regulator in the wake of the pandemic have expired. The RBI had in December warned of increased stress in banks' books upon the expiry of the special schemes. However, given their sound capital adequacy, banks would be able to absorb the shock, it had added.

Late last month, financial services secretary Sanjay Malhotra, too, met PSB chiefs and nudged them to satiate the growing credit appetite of a fast-recuperating economy that is also facing considerable external headwinds in the wake of the Russia-Ukraine conflict.

Non-food bank credit grew 9.7% in March, compared with 8% in the previous month and 4.5% a year before. However, loans to industry grew at a slower pace of 7.1% even on a marginally-contracted base.

While credit flow has improved in recent months, the government believes there is considerable scope for further bolstering lending. There is a growing requirement of working capital requirement of India Inc in light of soaring global commodity prices. Moreover, companies in select sectors like steel and chemicals have started expansion, kicking off the private investment cycle.