Banks' Asset Quality Hits 10-Year High With GNPA Ratio At 3.2% In Sept Quarter: RBI Report
Indian banks showed a positive trend in their financial health during the second quarter of the current fiscal year, marking a significant drop in their gross non-performing asset (GNPA) ratio, hitting a ten-year low as per the recent Reserve Bank of India (RBI) report released on 27 December.
The ongoing improvement in the banks' asset quality, which commenced in 2018-19, persisted into the first half of 2023-24, witnessing a decrease in the GNPA ratio from 3.9 per cent in March to 3.2 per cent by September, according to the 'Trend and Progress of Banking' report by RBI.
The combined balance sheet of banks notably expanded by 12.2 per cent in FY23, the highest growth in nine years, primarily fueled by increased lending to retail and service sectors. Furthermore, augmented net interest income and reduced provisioning contributed to an enhancement in net interest margin (NIM) and overall profitability in FY23.
RBI affirmed that both the banking system and non-banking financial companies (NBFCs) exhibit resilience, supported by robust earnings growth, improved asset quality and high capital ratios. This, in turn, is facilitating double-digit credit growth and fostering domestic economic activity, according to the central bank.
Sustaining and further enhancing this positive trajectory necessitates reinforcing governance and risk management practices, along with fortifying additional buffers, as per RBI's recommendations. The report highlighted that while the GNPA ratio remained highest for the agricultural sector, it remained lowest for retail loans. Additionally, during FY23, reported fraud instances in banks decreased to a six-year low, with the average fraud amount hitting a decade low.
The balance sheets of NBFCs saw substantial expansion in FY23, primarily driven by a robust credit growth rate. However, the RBI cautioned about lingering concerns within the sector despite its overall healthy status.
RBI's directives to NBFCs include diversifying their fundraising methods to lessen dependency on banks, reinforcing balance sheets, and fortifying defenses against frauds and data breaches. Emphasising the critical role of NBFCs in the financial ecosystem, the RBI highlighted the interconnectivity between banks and non-banks, underscoring the need for close scrutiny.
Moreover, while acknowledging well-capitalised banks, RBI stressed the importance of continuous evaluation of exposure to NBFCs and vice versa. It urged both banks and NBFCs to fortify their balance sheets through robust governance and risk management practices to align with the burgeoning needs of the Indian economy.
