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India's banks and non-bank lenders are set to witness a slew of regulatory and supervisory changes in the year ahead, as the central bank pushes ahead with its recent measures to strengthen the banking system.
The Reserve Bank of India (RBI) will consider removing prepayment penalties on floating rate term loans to small businesses; examine inter-linkages between private credit firms, banks and non-banks; and regulate payment aggregators engaged in point of sales terminals, the central bank's annual report on trends and progress in banking said. RBI is also working on issuing final guidelines on the disclosure framework for climate-related financial risks, which will include scenario analysis and stress testing for these risks.
“In India, the size of such private credit firms and the resources raised by them is not very large. A closer look is, however, warranted at the inter-linkages between REs (regulated entities), including banks and NBFCs, with such firms. Strong interrelationship between them could give rise to systemic concerns, along with the possibility of regulatory arbitrage to circumvent regulations,” the report for FY24 said.
The annual report presents the performance of India's banking sector, which includes commercial banks, co-operative banks and non-banking financial institutions.
Boards of banks and NBFCs should “show prudence and avoid exuberance,” RBI said, referring to these lenders' steep exposure limits on unsecured loans. During FY24, RBI had tightened risk weights on unsecured lending, after noticing that stress was building up thanks to aggressive lending. While this did moderate credit growth in unsecured loans, RBI warned that “delinquency levels and leverage warrant enhanced vigil”.
On 6 December, Mint reported that asset reconstruction companies are seeing a spike in the sale of bad debt in the unsecured retail loan portfolios, as stress rises in the microfinance and personal loan segments.
“While specific limits have been prescribed for unsecured lending by urban co-operative banks (UCBs), boards of SCBs (scheduled commercial banks) and NBFCs have discretion in fixing limits on unsecured exposures. However, some entities have fixed very high ceilings, which need to be continuously monitored," the RBI report said.
RBI also urged private sector banks to bring down high employee attrition by improving onboarding processes, and providing extensive training and career development opportunities, mentorship programmes, competitive benefits, and a supportive workplace culture to build long-term employee engagement. The report showed that the average attrition rate at private sector banks stood at around 25%.
“High attrition and employee turnover rate pose significant operational risks, including disruption in customer services, besides leading to the loss of institutional knowledge and increased recruitment costs. In various interactions with banks, the Reserve Bank has stressed that reducing attrition is not just a human resource function but a strategic imperative,” said RBI in its report.
RBI also noted that the health of India's banking system remained robust, with banks’ profitability improving for the sixth consecutive year in FY24, while their gross non-performing assets (GNPA) ratio touched its lowest level in 13 years at 2.7% at end of March 2024. Bad loans were seen to be the highest in agriculture at 6.2% and lowest in retail loans at 1.2%.
Deposit growth of banks accelerated to 13.4% in FY24 (excluding the merger impact of HDFC Ltd and HDFC Bank) from 11.0% a year ago. Credit growth, however, slowed down to 16% during FY24 from 17.4% a year ago.
Non-banks too saw strong credit growth in FY24. Credit quality improved and balance sheets were strengthened with improved profitability and strong capital buffer.
The report showed the number of bank frauds sharply rose in the first half of FY25 to 18,461 cases, while the amount involved jumped more than eightfold to ₹21,367 crore. The number of frauds stood at 14,480 involving ₹2,623 crore in the comparative period of FY23. The share of internet and card frauds in the total stood at 44.7% in terms of amount and 85.3% in terms of the number of cases.
Banks saw the maximum number of complaints relating to loans and advances, mobile/electronic banking and deposit accounts during FY24, contributing to 64% of the total complaints. Almost all pension-related complaints were filed against public sector banks whereas 60% of complaints around credit cards were filed against private sector banks.
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