RBI calls for stronger bank balance sheets

  • RBI, in a report released on Wednesday, said Indian banks and non-bank lenders need to further fortify their balance sheets by following stronger governance and risk-management practices.

Shayan Ghosh
First Published27 Dec 2023, 11:45 PM IST
These measures would help cater to growing aspirations of the Indian economy, the Report on Trends and Progress of Banking in India said.
These measures would help cater to growing aspirations of the Indian economy, the Report on Trends and Progress of Banking in India said.(Mint)

Indian banks and non-bank lenders need to further fortify their balance sheets by following stronger governance and risk-management practices, the Reserve Bank of India (RBI) said in a report released on Wednesday, even as it lauded the industry’s performance across multiple metrics. These measures would help cater to growing aspirations of the Indian economy, the Report on Trends and Progress of Banking in India said.

“The Indian banking system is well positioned to improve further, with better asset quality, high capital adequacy and robust profitability. The financial indicators of non-banking financial companies (NBFCs) are also set to strengthen further, underpinned by adequate capital, increased provisions and improved asset quality,” it added.

 

In 2022-23, the consolidated balance sheet of scheduled commercial banks (SCBs), minus regional rural banks, grew in double digits at 12.2%, the highest in nine years. “The main driver of this growth on the asset side was bank credit, which recorded its fastest pace of expansion in more than a decade. Deposit growth also picked up, although it trailed credit growth, resulting in higher recourse to borrowings,” the report said.

Buoyed by an insatiable appetite for loans among India’s individual borrowers, banks posted non-food credit growth of 15.4% in 2022-23, compared to 8.7% in 2021-22. The momentum has continued in the current fiscal. Non-food credit growth stood at 20.9% as of 1 December, although some of it is because of the merger of Housing Development Finance Corp. (HDFC) with HDFC Bank in July.

 

“Lower slippages helped improve asset quality across all bank groups, with GNPA (gross non-performing assets) to total advances ratio of SCBs dropping to a 10-year low. Higher lending rates and lower provisioning requirements helped to improve the profitability of banks and shored up their capital positions,” the report said.

While the consolidated net profit of the banking industry grew 44.6% in 2022-23 (state-owned banks’ net profits rose 57.3% and private sector banks, 29%), the improvement in asset quality is evident in their bad loan data.

 

GNPA as a percentage of gross loans stood at 5% for state-run banks and 2.3% for private banks in 2022-23, compared to 7.3% and 3.8%, respectively, in 2021-22. The overall GNPA ratio of banks improved from 5.8% in 2021-22 to 3.9% in 2022-23, and further to 3.2% as on 30 September.

Experts appreciated RBI’s efforts to pre-empt stress in the financial services space. “Given the improved profitability and capital position of banks and non-banks, the recent RBI actions of higher risk weights, provisioning on stressed exposures, and proposed transition to the expected credit loss (ECL) framework for banks are steps towards strengthening of the balance sheets of these institutions,” said Anil Gupta, senior vice-president and co-group head, Icra Ltd. “These are in the right direction since capital and provisioning buffers can be built during good times. We could expect similar measures to continue in the near future.”

 

Meanwhile, banks also strengthened their capital buffers in 2022-23. The capital adequacy ratio or capital funds as a percentage of risk-weighted assets was at 17.3%, up 50 basis points (bps) from the previous fiscal. This improvement was largely due to public sector banks, whose capital adequacy expanded 90bps year-on-year (y-o-y) to 15.5%. Private banks saw capital adequacy dip 20bps to 18.6% in 2022-23.

The report also reiterated a point recently made by governor Shaktikanta Das on the need for non-banks to diversify their sources of funding. “Looking ahead, given the increasing interconnectedness between banks and NBFCs, the latter should focus on broad-basing their funding sources and reduce overdependence on bank funding,” it said.

At the same time, the report pointed out how NBFCs showed robust balance sheet growth that was accompanied by better asset-quality metrics and stronger capital buffers. The pace of expansion of NBFC balance sheets, RBI said, gathered steam in 2022-23 and was led by double-digit credit growth, thanks primarily to unsecured loans.

Last month, RBI mandated higher risk weights on unsecured loans or those without collateral. The change is applicable to unsecured loans disbursed by banks and non-banks, and on bank loans to non-bank financiers for onward lending. The report said over 50% of loans by foreign banks are unsecured, while the share is lower at 27.3% and 22.6% for private banks and public sector banks, respectively.

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First Published:27 Dec 2023, 11:45 PM IST
HomeIndustryBankingRBI calls for stronger bank balance sheets

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