RBI's June Financial Stability Report (FSR) presents a positive picture of India's economic and financial health. The gross non-performing assets (GNPA) of commercial banks stood at 2.8 percent in March this year. It may further come down to 2.5 percent by the end of the current financial year, while the net NPA remained at 0.6 percent. According to the report, “The asset quality of scheduled commercial banks continues to improve and their gross NPA ratio fell to a 12-year low in March 2024. Backed by strong balance sheets, banks are actively lending, thereby supporting economic activity. The report notes strong balance sheets of financial institutions with good earnings and adequate capital. RBI's stress tests show that even under severe stress scenarios, the capital levels of banks and non-banks will remain above the minimum regulatory capital level. The report says the capital to risk-weighted assets ratio (CRAR) and equivalent equity tier 1 ratio of scheduled commercial banks (SCBs) stood at 16.8 per cent and 13.9 per cent respectively at the end of March, but the real challenge is to maintain it. And it will have to improve further as the country faces risks arising from ongoing conflicts between different countries in the world, climate change and adoption of financial technologies.
The report also points out that it said the sustained decline in the gross NPA ratio since March, 2020 is primarily due to a sustained decline in the growth of new NPAs and an increase in write-offs. Banks have written off more than double the amount of loans they recovered in five years. In the last five financial years, loans worth more than Rs 10 lakh crore have been written off. According to the guidelines of the Reserve Bank, such bad loans, for which after completion of four years, the bank will make provision of the entire amount in its account. If the amount is given, it is removed from the balance sheet of the bank, although the bank makes this provision from its own sources and public money because banks do not have their own money. This is called write off.
Amidst these figures, the level of bad loans in the agriculture sector is still 6.2 percent, which also shows the poor condition of this sector which provides employment to a large number of people. At the same time, the contribution of personal loans in the loan growth in private sector banks is more than half, which is worrying as personal loans have increased in the last few years. RBI has expressed concern over the high default level in personal loans below Rs 50,000. As of April, 2024, the total exposure of banks on personal loans was Rs 53.62 lakh crore.
Earlier in May, the Reserve Bank of India (RBI) had announced to pay a dividend of Rs 2.11 lakh crore to the central government for the financial year 2023-24. This amount is more than double that of a year ago. For the financial year 2022-23, RBI had given a dividend of Rs 87,416 crore to the government. Earlier, the highest level given by RBI was in the year 2018-19, when the Reserve Bank had given a dividend of Rs 1.76 lakh crore to the central government. RBI, as per Section 47 (Allocation of Surplus Profits) of the Reserve Bank of India Act, 1934, transfers the surplus – i.e. the excess of income over expenditure – to the government. This is the case in most countries, the laws of the US Federal Reserve, Bank of Japan, Bank of England, German Bundesbank make it clear that profits must be transferred to the government or treasury. The changes in some of the dividend policies have been made in accordance with the recommendations of the Bimal Jalan Committee, which were adopted by the central bank on August 26, 2019.
Over the past few years, the banking sector has been undergoing structural changes. In 2018, the government established India Post Payment Bank with the aim of taking banking to every village using the post office network. In fact, the beginning of making India self-reliant can only be made by making villages self-reliant. Sensex is crossing 75000 index but it does not reflect the agriculture sector, hence in the coming days, policy makers will have to pay special attention to the agriculture sector. Distributing small amounts of money to the underprivileged will not be enough to get the economy back on track. We need large and inclusive financial spending and well-planned planning to strengthen rural infrastructure. By tying up NGOs and Farmer Producers Organizations (FPOs) with business schools, a strong entrepreneurship ecosystem can be developed which will create a vibrant rural economy and promote innovation. The potential of the Indian Agri-Tech market is estimated to be $22 billion by 2025, of which till now we have barely reached 5 per cent.
Banking online fraud remains a big challenge, according to a study by Deloitte Research Agency, currently 110 crore people in the country are using mobile phones, out of which 72 crore people are using smartphones and its number is expected to cross 100 crores by 2026. Still, due to online fraud, currently only five crore people use mobile banking. Instead of continuing to write off large corporate bad loans, India needs to improve debt recovery processes. The government should not rush to privatise banks, rather it should focus on comprehensive governance reforms because if the banking sector is run by independent boards and in a dynamic manner, then public sector banks can also function like any other private bank. Therefore, banks should move beyond their role of wealth creators and support the role of job creators so that along with these banks, the balance sheet of the country can also be strengthened.
