Opinion RBI report on banking system: Signs of good health

The Indian banking system has continued to register a robust performance across various metrics. As per the Reserve Bank of India’s latest financial stability report, not only have banks seen a sustained improvement in their asset quality, but their profitability has remained high, and their capital position also remains healthy. This improvement is being observed across both public and private sector banks. This has, in turn, improved their attractiveness — the Nifty Bank index is up more than 16 per cent over the past year, with PSU banks registering handsome gains.

According to the report, the gross non-performing loans of the Indian banking system have declined to a 12-year low of 2.8 per cent in March, with declines observed across public, private and foreign banks. Sector wise data shows that bad loans have fallen across agriculture, industry, services and the personal loans category, though within industry, they remain high in gems and jewellery and construction segments, and within personal loans in the credit card segment. This broad decline in bad loans has been driven by a combination of write-offs and fall in fresh bad loans — the half-yearly slippages have fallen across all bank groups. Alongside, banks have improved their provision coverage ratios, their net interest income has risen, and their capital position remains healthy. The stress tests conducted to gauge the strength of bank balance sheets do indicate that they are well placed to absorb macroeconomic shocks. And even in the severe stress case scenario, their capital position would remain above the minimum requirements. Further, banks may well see bad loans fall further to 2.5 per cent by March 2025 under usual business conditions.

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However, there are some areas that require a closer look. Even as the asset quality of retail loans has improved — bad loans have fallen from 2.1 per cent in June 2022 to 1.2 per cent in March 2024 — in the case of private sector banks, slippages from retail loans accounted for 40 per cent of fresh addition to bad loans. In consumer credit, in the case of personal loans below Rs 50,000, the delinquency levels are high. And, a sizable section of borrowers has multiple loans. While the central bank has been cognisant of the risks in this segment, this requires continuous supervision.