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17 previously had concentrated presence in South India can now expand its reach in central and eastern parts through its alliance with Allahabad Bank. SCBs turn Profitable in FY20 Indian Scheduled Commercial Banks (SCBs) turned profitable in FY20 after two years of losses. Banks were able to generate interest income at a higher rate than interest expenses during the year. Despite deposits growing faster than credit during FY20, interest expenses remained well within control because deposit rates were lowered significantly as compared to lending rates. The improvement in the industry’s net profit was also on account of a fall in provisioning expenses. Financial performance continued to be upbeat in H1 FY21 on account of moratorium and standstill in asset classification. However, there are concerns that as policy support starts being rolled back in FY21, the health of some banks might get affected. For instance, according to the RBI, moratorium had been availed of on around 40% of the outstanding loans of the financial system, including banks and non-bank lenders at the end of August 2020. The data showed that moratorium was higher among MSMEs customers, with nearly 80% of such customers availing of the facility. Bank Credit Slumps to Five-Decade Low of 6.1% in FY20 Lower demand, concerns of subdued economic activity and risk aversion among banks led to bank credit growth slowing down to 6.1% in FY20. This was the slowest growth recorded since the year ended March 1962, when aggregate advances had grown by merely 5.4%. Deposit growth of SCBs remained elevated during the first three quarters of FY20. In Q4 FY20, however, deposit growth, especially in private sector banks, decelerated. As the public stashed more cash in response to the pandemic and as solvency issues relating to a bank in the private sector cropped up, it led to some reassignment of deposits. Term deposits, which contributed nearly 60% of total deposits, showed moderation amid easing interest rates and better returns on other competing assets. In case of private sector banks, term deposit growth showed a sharp decline during FY20 as compared with public sector banks, which posted almost four-fold growth during the same period. Foreign banks, meanwhile, recorded a sharp uptick in low-cost current and saving account (CASA) deposits in FY20, although their share in total deposits is small. Muted credit growth and relatively strong deposit growth for most part of the year led to a decline in borrowing requirements of banks, excluding private sector ones. 0 2 4 6 8 10 12 14 16 18 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Growth (%) Trends i n Credit and Deposit Growth (y-o-y) Deposit Credit Source: RBI Dun & Bradstreet