What the RBI’s latest report tells us about the state of Indian banks

Until a couple of years ago, India’s banking sector was engulfed by a massive cloud of bad loans that slowed credit growth and, in turn, hurt broader economic activity. And the onset of the Covid-19 pandemic last year threatened to make matters far worse. But the situation seems to be improving. At least that’s what the Reserve Bank of India’s latest report on the banking sector indicates.

The RBI’s Report on Trend and Progress of Banking in India 2020-21 evaluates the performance of the banking sector, including co-operative banks, and non-banking financial institutions during 2020-21 and 2021-22 so far.

The report said that during 2020-21, the banking sector navigated the disruptions caused by the pandemic and the economic downturn with resilience, and that various policy measures undertaken by the RBI and the government cushioned the impact of these negative developments.

Also, banks’ asset quality improved and public-sector banks reported net profits after a gap of five years. The capital position of banks improved, aided by recapitalisation by the government as well as raising of funds from the market. Recovery of loans through insolvency proceedings helped as well, even though initiation of fresh insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) was suspended for a year till March 2021.

The RBI, however, warned that incipient stress remains in the form of increased proportion of restructured advances and the possibility of higher slippages arising from sectors that were relatively more exposed to the pandemic.

Still, banks’ financial position is likely to improve with the green shoots of recovery re-emerging in the first half of the current financial year, the banking regulator said.

The report also said that the RBI has started pulling back some of the policy measures it had taken in response to the pandemic. Certain liquidity measures have been wound down while other regulatory measures, including deferment of implementation of net stable funding ratio and restrictions on dividend payouts by banks, have been realigned to avoid extended forbearance and risks to financial stability while providing targeted support to needy sectors.

Banks’ asset quality, credit growth

According to the report, during 2020-21, the consolidated balance sheet of scheduled commercial banks (SCBs) expanded in size, notwithstanding the pandemic and the resultant contraction in economic activity.

In 2021-22 so far, nascent signs of recovery are visible in credit growth. Deposits grew by 10.1% at end-September 2021 as compared with 11% a year ago.

The capital to risk weighted assets (CRAR) ratio of SCBs strengthened from 14.8% at end-March 2020 to 16.3% at end-March 2021 and further to 16.6% at end-September 2021. This was thanks to higher retained earnings, recapitalisation of public-sector banks and fundraising from the market by both state-run and private-sector banks.

In addition, banks’ gross non-performing assets ratio declined from 8.2% at end-March 2020 to 7.3% at end-March 2021 and further to 6.9% at end-September 2021.

Moreover, return on assets (RoA) of SCBs improved from 0.2% at end-March 2020 to 0.7% at end-March 2021, aided by stable income and decline in expenditure.

Co-operatives banks, NBFCs

The balance sheet growth of urban co-operatives banks in 2020-21 was driven by deposits, while subdued credit growth led to acceleration in investments. Their financial indicators, including capital position and profitability, improved.

The profitability of state co-operative banks and district central co-operative banks improved in 2019-20, while their asset quality deteriorated.

The consolidated balance sheet of NBFCs expanded during 2020-21, driven by credit and investments of non-deposit taking systemically important NBFCs. Their asset quality and capital buffers improved as well, the RBI report showed.