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What's the article about?
- It discusses the key findings of the latest RBI report, which show a healthy Indian banking system.
Relevance:
- GS3: Indian economy; Prelims
Context:
- Recently the Reserve Bank of India (RBI) released its annual report on the trend and progress of banking in India.
- As per this report the health of Indian banks continued to improve in 2021-22.
Key Findings:
- 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.
- Capital Adequacy Ratio (CAR) is the ratio of a bank's capital in relation to its risk weighted assets and current liabilities.
- It is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process.
- 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.
- 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.
- The public sector banks (PSBs) 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.
- Capital adequacy of banks rose from 14.1 per cent in 2021 to 15.7 per cent in 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.
Way Forward:
- Findings of this report indicate that the Indian financial system is going in the right direction.
- However, there are some causes for concern such as rising numbers of SMA-0 classified loans and restructured loans during COVID period.
- SMA are those accounts that show symptoms of bad asset quality once the account is overdue or before its being identified as NPA. There are three types of SMA – SMA 0, SMA1 and SMA 2. They are usually categorized in terms of duration.
- Further, banks will have to be mindful of the risks emanating from an increasingly uncertain global macroeconomic environment.
