Non-performing assets of Indian Public Sector Banks (PSBs) declined in H1 of 2019-20, but so did bank credit growth which is a concern, said a RBI report on Tuesday.

Credit growth has turned anaemic in 2019-20. Bank credit to industry decelerated in 2018-19 and in 2019-20 so far, partly tracking the slowdown in industrial production. In 2018-19, out of the 19 industry sub-groups, credit accelerated only to eight as compared with 12 in the previous year. Other sub-sectors such as food processing, textiles, paper and paper products, petroleum and coal products, gems and jewellery, and basic metals also experienced a decline in credit flows.

The banking sector's health hinges on macroeconomic turnaround, the apex bank report said while adding that credit growth negatively impacted by slowdown in global and domestic growth.

The Reserve Bank of India's report, "Trend and Progress of Banking in India 2018-19", presents the performance of the banking sector, including co-operative banks, and non-banking financial institutions during 2018-19 and 2019-20 so far. The Report on Trend and Progress of Banking in India is for the year ended June 30, 2019.

During 2018-19, bank credit to agriculture accelerated, mainly on the back of expanding the ambit of the interest subvention scheme provided by the government for ensuring availability of credit to the sector at a reasonable cost and enhancement of the limit for collateral-free agricultural loan by the Reserve Bank. However, this has declined significantly in H1, 2019-20.

Services sector credit growth accelerated on enhanced flows to shipping, trade, commercial real estate and NBFCs. Of the incremental non-food credit expansion, NBFCs accounted for 14.6 per cent - the highest amongst the services sub-sectors - reflecting the recent initiatives taken by the Reserve Bank and the government.

But the banking sector has showed improvement with the gross non-performing assets (GNPA) ratio of Scheduled Commercial Banks (SCBs) declining from 11.2 per cent in March 2018 to 9.1 per cent in March 2019 and a return to profitability in H1 of 2019-20, according to an RBI report released on Tuesday.

As the bad loan recognition process nears completion, gross non-performing loans of banks improved to 9.1 per cent as of end-September 2019, compared to 11.2 per cent in FY18, says the report, "Trend and Progress of Banking in India 2018-19".

Net non-performing assets (NPAs) of all commercial banks reduced to 3.7 per cent in FY19 as against 6 per cent in FY18.

"The gross NPA ratio of all banks declined in FY19 after rising for seven consecutive years, as recognition of bad loans neared completion," the RBI report said.

During 2018-19, the asset quality of scheduled commercial banks turned around after a gap of seven years. With a concomitant reduction in provisioning requirements, the banking sector returned to profitability in the first half of 2019-20, while recapitalisation helped public sector banks in shoring up their capital ratios.

The Insolvency and Bankruptcy Code gained traction, enhancing resolutions.

Furthermore, credit growth revival that began in 2017-18 maintained momentum into 2018-19, led by private sector banks. Notwithstanding these gains, credit growth has turned anaemic in 2019-20 while the overhang of NPAs remains high, and further improvements in banking sector hinge around a reversal in macroeconomic conditions.

The pace of credit expansion by NBFCs, which began slowing in 2018-19, continued in the first half of 2019-20, largely affected by the performance of non-deposit taking systemically important NBFCs (NBFCs-ND-SI), though capital buffers remained above the stipulated norms. Bank credit remained a stable source of funding for NBFCs.

The report, presenting the performance of the banking sector, including co-operative banks, and non-banking financial institutions during 2018-19 and 2019-20 so far, is for the year ended June 30, 2019.

In the co-operative banking arena, the consolidated balance sheet of Urban Co-operative Banks (UCBs) expanded in 2018-19 on account of robust deposit growth, although, a fall in interest income adversely affected their profitability and among rural co-operatives, the financial health of state co-operative banks and district central co-operative banks weakened with an increase in the non-performing assets and slowdown in profitability.