ICICI Bank, AU SFB well-placed as credit cycle turns more disciplined: Siddhartha Khemka

The Indian banking sector, a crucial pillar of the nation's economy, is currently undergoing a significant and positive recalibration. This shift, characterized by improving asset quality and a more disciplined approach to credit growth, marks a departure from the challenges of the past decade and signals a healthier trajectory for India's financial system. Understanding this evolution is vital for aspirants of competitive exams, as it reflects the interplay of economic policy, regulatory oversight, and market dynamics.

**Background Context and Historical Journey:**

To appreciate the current improvements, we must first understand the recent past. The Indian banking sector was grappling with a severe Non-Performing Assets (NPAs) crisis, which peaked around 2015-2018. This crisis was a culmination of several factors: aggressive lending during the economic boom of the 2000s, especially to infrastructure and corporate sectors; a global economic slowdown; policy paralysis; and lax risk management practices by banks. Public Sector Banks (PSBs), in particular, bore the brunt of this crisis due to their historical mandates and often politically influenced lending decisions. The Gross NPAs of Indian banks peaked at over 11.5% in March 2018, severely impacting their profitability and capacity for fresh lending. This period necessitated drastic measures, including massive recapitalization of PSBs by the government (e.g., under the Indradhanush plan), stringent asset quality reviews (AQR) by the Reserve Bank of India (RBI), and the enactment of the Insolvency and Bankruptcy Code (IBC) in 2016.

**What's Happening Now: A Disciplined Turn:**

Fast forward to today, and the narrative has significantly changed. The banking sector is witnessing a turnaround, with asset quality showing marked improvement. Banks have cleaned up their balance sheets through higher provisioning, recoveries under IBC, and sale of distressed assets. This improved health has enabled a more selective and disciplined approach to credit growth. The article highlights several key trends: PSUs are regaining market share in crucial segments like MSME (Micro, Small, and Medium Enterprises) and home loans, which are traditionally considered stable. Simultaneously, there's a moderation in unsecured lending (e.g., personal loans, credit cards without collateral), with a stronger emphasis on secured retail lending (e.g., vehicle loans, home loans). This shift towards secured assets enhances stability and reduces systemic risk. Analysts are now favoring 'execution-led' lenders, both private (like ICICI Bank) and small finance banks (like AU SFB), indicating a focus on operational efficiency and robust risk management.

**Key Stakeholders Involved:**

* **Reserve Bank of India (RBI):** As the central bank and primary regulator, the RBI has been instrumental in driving this change. Its proactive policies, including the AQR, Prompt Corrective Action (PCA) framework, and stringent capital adequacy norms (aligned with Basel III), forced banks to recognize and resolve NPAs. The RBI's monetary policy decisions also influence credit cycles.

* **Government of India:** Through recapitalization of PSBs, legislative reforms like the IBC, and various financial inclusion schemes (e.g., Pradhan Mantri Jan Dhan Yojana), the government plays a critical role in shaping the banking landscape and ensuring financial stability.

* **Public Sector Banks (PSBs):** Despite their past struggles, PSBs remain crucial due to their extensive branch networks and reach, especially in rural and semi-urban areas. Their regaining of market share in MSME and home loans is a positive sign of their resurgence and continued commitment to developmental banking.

* **Private Sector Banks (PVBs):** Known for their agility, technology adoption, and focus on profitability, PVBs like ICICI Bank have often led the way in adopting best practices in risk management and customer service. Their 'execution-led' approach is now more valued.

* **Small Finance Banks (SFBs):** Created to further financial inclusion by providing banking services to unserved and underserved sections of the economy, SFBs like AU SFB are emerging as significant players, particularly in niche segments and regional markets.

* **Borrowers (MSMEs, Retail Customers, Corporates):** Their access to credit, interest rates, and overall financial health are directly impacted by the banking sector's performance and policies.

**Significance for India and Future Implications:**

This recalibration is profoundly significant for India's economic future. A healthy banking sector is the bedrock of economic growth, enabling efficient capital allocation, fostering investment, and creating employment. Improved asset quality frees up capital for fresh lending, particularly to productive sectors like MSMEs, which are vital for job creation and economic dynamism. The moderation in unsecured lending, while potentially slowing consumption in the short term, ensures long-term financial stability by curbing excessive risk-taking. This disciplined approach also enhances investor confidence, potentially attracting more foreign capital into the Indian financial system.

Historically, the nationalization of banks in 1969 and 1980 aimed at channelizing credit to priority sectors, a role that PSBs continue to play. The current trend suggests a more balanced approach, combining social objectives with prudential lending practices. The **Banking Regulation Act, 1949**, and the **Reserve Bank of India Act, 1934**, form the foundational legal framework governing the banking sector, empowering the RBI to regulate and supervise banks. The **Insolvency and Bankruptcy Code, 2016**, has been a game-changer in resolving corporate distress and improving recovery rates for banks, thereby directly contributing to better asset quality. While specific constitutional articles don't govern banking performance directly, the broader objective of economic justice and welfare enshrined in the Directive Principles of State Policy (Part IV of the Constitution), particularly Article 39(b) and (c) regarding the distribution of material resources and prevention of concentration of wealth, underpins the state's involvement in ensuring a robust and inclusive financial system.

Looking ahead, the future implications include sustained economic stability, potentially lower credit costs as risks reduce, and a more resilient financial system capable of weathering economic shocks. We can expect continued emphasis on digital banking, robust risk management frameworks, and a dynamic competitive landscape where different types of banks cater to diverse needs. This disciplined credit cycle sets the stage for India to achieve its ambitious economic growth targets, making the financial sector a strong enabler rather than a drag on the economy.