Opinion Express view on RBI’s latest financial stability report: Welcome turnaround

The asset quality of the Indian banking system continues to show improvement. As per the Reserve Bank of India’s latest financial stability report, banks’ gross non-performing assets have fallen to a 10 year low of 3.9 per cent in March 2023. The improvement has been across the board with bad loans falling in both public and private sector banks, and in major sectors of the economy. Alongside, there has also been a steady improvement across key financial parameters of the corporate sector. As per the report, private non-financial companies have managed to bring down their debt to equity ratios further, and have seen an improvement in their debt servicing capacity. As a consequence, unlike in the past when the balance sheets of both banks and firms were impediments to investment activity, they are now “engendering a twin balance sheet advantage for growth” as per RBI Governor Shaktikanta Das. These are encouraging signs for the economy.

The improvement in the asset quality of banks is likely to continue. Stress tests by the central bank suggest that bad loans are likely to decline further to 3.6 per cent by the end of March 2024. However, this trend could be disrupted if the macroeconomic environment worsens. Alongside, banks have managed to sustain the momentum in their profitability as their net interest margins continue to grow, their provisioning coverage ratio is high, and their capital position is healthy. In fact, the capital to risk-weighted assets ratio has touched a high implying that banks are well capitalised and can absorb macroeconomic shocks. As per the RBI’s assessment, they will be able to comply with the minimum capital requirements even under adverse stress scenarios.

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However, there are some areas of concern. In the retail loan category, even though NPAs are low, loans where the principal or the interest payments or any other amount wholly or partly overdue has remained outstanding for a specified time (special mention accounts), were high at 7.4 per cent. For public sector banks they were even higher in both the secured and unsecured loan category, amounting to almost a tenth of their retail portfolio. For public sector banks, 6.1 per cent of education loans have turned bad, as have 18 per cent of credit card receivables. The share of unsecured retail loans has also risen from 22.9 per cent to 25.2 per cent. Further, under the emergency credit line guarantee scheme, one-sixth of accounts have turned non-performing, with the distress being majorly seen in micro enterprises, in the services and trade sectors. In the case of industry, while bad loans have fallen, they remain high in segments such as gems and jewellery, construction, food processing and textiles. These areas require close monitoring.