Opinion Express View on banking sector: In good health

Two reports released by the Reserve Bank of India show that the health of the Indian banking system continues to improve on key parameters. One, bad loans of both public and private sector banks have declined to multi-year lows. Two, high interest margins have, in part, helped boost their profitability. And three, banks’ capital position is also in good shape. Their healthier balance sheets allow for a robust, broad-based expansion in credit growth.

At the end of March 2018, gross non-performing loans of banks had touched 11.6 per cent. But, by September 2023, bad loans had fallen to 3.2 per cent as per the RBI’s report on trends and Progress of Banking in India. The scale of this decline is worth noting — bad loans of large industries have fallen from 22.9 per cent in March 2018 to 4.6 per cent in June 2023. The central bank has also noted that the slippage ratio, which measures new additions to bad loans, has moderated. In fact, as per ICRA’s estimate, bad loans are likely to fall further to 2.1-2.5 per cent by March 2025. Alongside, banks’ capital to risk-weighted assets ratio and common equity tier 1 ratio stood at 16.8 per cent and 13.7 per cent in September 2023 respectively. As per RBI’s Financial Stability Report, the macro stress tests conducted by it indicate that at these levels banks have adequate capital buffers. And even under adverse economic circumstances, their capital levels will remain above required norms. The central bank also notes that non-banking financial companies have also seen a decline in their bad loans, and that their capital position is strong.

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There are areas of concern. The RBI has recently flagged the surge in unsecured personal loans, which have grown at a much faster pace than overall credit growth. It has taken steps to “dampen growth exuberance” among lenders (banks and NBFCs), and ensure that they have “loss-absorbing buffers”. However, it notes that the asset quality of these unsecured loans or retail lending has not exhibited any signs of deterioration. In fact, bad loans in the retail segment fell to 1.6 per cent in September, while for the unsecured loans segment, they fell to 2 per cent. While such areas do warrant closer and continuous monitoring and appropriate regulatory interventions, the broad trends presented in these reports indicate that the Indian financial system is in good health.