Indian Banks reports card: Asset Quality and Balance Sheet best since 2014

Indian Banks’ Asset Quality:

• The Reserve Bank of India (RBI) reported continued improvement in Indian banks’ asset quality, with the gross non-performing asset (GNPA) ratio reaching a new decadal low as of September-end.
• The trend of improving asset quality, measured by GNPA ratios, has been ongoing since 2018-19 and persisted into 2022-23.
• The GNPA ratio for Scheduled Commercial Banks (SCBs) dropped to 3.9% at the end of March 2023 and further decreased to 3.2% at the end of September 2023.
• Recoveries and upgradations accounted for around 45% of the reduction in GNPAs of SCBs during 2022-23.
• The agricultural sector had the highest GNPA ratio, while retail loans had the lowest.
• Both the banking system and non-banking financial companies (NBFCs) remained resilient, supported by high capital ratios, improved asset quality, and strong earnings growth.
• This resilience contributed to double-digit credit growth and domestic economic activity.
• The central bank emphasized the importance of strengthening governance and risk management practices to sustain this improvement and build additional buffers.
• The slippage ratio, measuring new accretions to NPAs as a percentage of standard advances, moderated during 2022-23 and continued to do so in the first half of 2023-24.

Commercial Banks and NBFCs:

• Commercial banks’ consolidated balance sheet grew by 12.2% in 2022-23, the highest in nine years, driven by robust credit growth.
• During the same period, the total amount of frauds reported by banks reached a six-year low, with the average amount involved in frauds being the lowest in a decade.
• NBFCs also experienced significant balance sheet growth in 2022-23, supported by double-digit credit growth.
• Despite the positive outlook, the RBI warned of concerns, emphasizing the need to monitor the high level of interconnectedness between banks and non-banks.
• Banks should evaluate their exposure to NBFCs, while NBFCs should focus on diversifying funding sources and reducing reliance on bank funding.
• The consolidated balance sheet of SCBs in 2022-23 witnessed a growth of 12.2%, primarily fueled by credit provided to the retail and services sectors.
• At the end of September 2023, the capital to risk-weighted assets ratio (CRAR) of SCBs stood at 16.8%.
• Higher net interest income and lower provisioning played a significant role in boosting the net interest margin (NIM) and profitability of banks in 2022-23.
• Urban co-operative banks (UCBs) witnessed a 2.3% growth in their combined balance sheet in 2022-23, driven by loans and advances.
• UCBs also experienced improvements in their capital buffers and profitability throughout 2022-23 and the first quarter of 2023-24.
• The consolidated balance sheet of NBFCs expanded by 14.8% in 2022-23, mainly due to double-digit credit growth.
• The sector remained well-capitalized, with the CRAR exceeding the regulatory requirement, and saw improvements in profitability and asset quality during this period and the first half of 2023-24.