Economic Survey 2024: Banks well-positioned to finance investment demand

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Mumbai: India’s banking and financial sector is now in a position to finance the growing investment demand on the back of cleaner balance sheets and strong capital buffers, the Economic Survey 2024 said.

According to the survey, loans to small businesses and the services sector have continued to grow in double digits, and housing loans have surged as a result of rising demand. However, credit offtake by large industries has grown at a slower but stable pace.

“These larger industries seem to be tapping the corporate bond market,” the survey said. It added that corporate bond issuances were up by 70.5% in FY24, with private placement remaining the preferred channel for corporates.

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Historically, corporate loans have far outstripped aggregate retail loans from banks, especially because of their larger ticket sizes. That changed about four years ago, when retail loans surpassed credit to corporates for the first time in November 2020.

Loans to industries stood at ₹37 trillion at the end of May 2024, up 9.4% from the same period last year. Loans to large industries grew 7.1% yoy to ₹26.5 trillion. In comparison, retail loans grew 28.7% yoy to ₹54.6 trillion as of the end of May.

Private capex at multi-year lows

The survey also expressed hope that improved balance sheets would help the private sector cater to strong investment demand. However, it cautioned that after good growth in the past three years, private capital formation may turn slightly cautious because of fears of cheaper imports from countries that have excess capacity.

Experts have reiterated that the current investment cycle is being led by government capital expenditure, with private capex yet to take off. In the interim budget announced in February, the government earmarked ₹11.1 trillion for capex, or 11.1% higher than the 2023 outlay. The full budget on Tuesday is expected to boost this.

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Private capex has been lacklustre of late. Mint reported on 1 July that the value of new project announcements plunged to a multi-year low in the June quarter of FY25, with economists largely attributing it to the seven-phase general elections. Companies announced new projects worth ₹59,931 crore across the country during the quarter, the lowest in over a decade and down 92% year-on-year, showed provisional data from the project-tracking database of the Centre for Monitoring Indian Economy (CMIE).

RBI's role is crucial

The Economic Survey also highlighted the role of the Reserve Bank of India in keeping a keen eye on the banking and financial system. “The RBI remains proactive in undertaking regulatory action. In a measure to regulate the exuberant growth in the unsecured lending category and preserve financial stability, the RBI tightened norms around this portfolio,” it said.

In November 2023, the RBI raised the risk weights assigned to unsecured consumer credit such as personal loans and credit card dues. Risk weights determine how much capital will be consumed for that specific loan and are based on the risk perception of various loan categories. The higher the perceived risk, the higher the risk weight.

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The Economic Survey also cited data from RBI’s Financial Stability Report in June, which showed the asset quality of banks has improved, with gross bad loans as a percentage of total loans falling to a 12-year low of 2.8% as of 31 March.

Moreover, even as the capital adequacy ratio of the banking system declined 37 basis points (bps) in FY24 after the RBI’s changes to risk weights, it remained above the RBI’s threshold of 9%.

“Prompt regulatory actions shield the banking and financial system from adverse developments and instil confidence in market participants,” the survey said, adding that the soundness of the banking system will facilitate the financing of productive opportunities and lengthen the financial cycle, both of which are necessary to sustain economic growth.