The health of the banking system in India has shown steady improvement, according to the Reserve Bank of India’s latest report on trends in the sector. From capital adequacy ratio to profitability metrics to bad loans, on each of these indicators, both public and private sector banks have shown visible improvement. And as credit growth has also witnessed an acceleration in 2021-22, banks have seen an expansion in their balance sheet at a pace that is a multi-year high. At a time when both household and government balance sheets remain under stress, this report indicates that the twin balance sheet crisis — of an over-leveraged corporate sector and a banking system saddled with bad loans — that acted as a drag on the Indian economy for years is no longer an impediment to growth.
After years of sluggish growth, credit growth has risen to a 10-year high at the end of September 2022. The disaggregated data shows that both working capital and term loans have seen an uptick. This is a healthy sign. While the public sector banks have lost market share to their private sector counterparts, PSBs still account for a lion’s share of the consolidated bank balance sheet — they account for 62 per cent of total outstanding deposits and 58 per cent of advances of the banking sector at the end of 2021-22. The report also points out that both public and private sector banks have seen a steady improvement in their capital position, their asset quality, and their leverage and liquidity positions. Capital adequacy of banks, as measured by the capital to risk weighted assets ratio, rose from 14.1 per cent in 2021 to 15.7 per cent in 2022, and further to 16 per cent in September 2022. Banks have witnessed a sharp decline in their gross non-performing loans or bad loans — from the peak of around 11 per cent in 2017-18 to around 5 per cent at the end of September 2022. This decline has been driven by a combination of factors — lower slippages, recoveries and write-offs. Bad loans, though, remain higher among the bigger industries as compared to the MSMEs.
In its report, the central bank has emphasised the health of the banking system, noting that it has “weathered the pandemic, emerging more resilient and robust”. However, there is cause for concern. First, loans classified as SMA-0 (those where repayments are due for 0-30 days) have shot up, indicating a build-up of strain in the system. Second, a close watch will also need to be kept on loans that were restructured as they were facing Covid-related stress. Slippages will need to be monitored. Further, banks will have to be mindful of the risks emanating from an increasingly uncertain global macroeconomic environment.
