RBI Financial Stability Report June 2023: Bad loans fall to a decade low of 3.9 percent

By: Yash Gupte

Despite numerous global headwinds, the country is positioned to be among the fastest growing major economies. For both manufacturing and services, India's purchasing managers' indices (PMIs) continue to perform better than regional and international indices.

According to the Reserve Bank of India’s half-yearly Financial Stability Report (FSR), the gross non-performing assets (GNPA) ratio of commercial banks continued its downward trend and fell to a 10 year low of 3.9 percent in March 2023. The capital to risk-weighted assets ratio (CRAR) and the common equity tier 1 (CET1) ratio of scheduled commercial banks (SCBs) rose to historical highs of 17.1 per cent and 13.9 per cent, respectively, in March 2023.

The RBI releases the FSR report every six months, which provides information about the state of the Indian banking system. According to the report, there has been a broad-based improvement in the asset quality of scheduled commercial banks (SCBs), with a consistent decrease in the stressed advances ratio across all significant industries. Additionally, the RBI noted that while the asset quality of personal loans has generally improved, impairments in the credit card receivables segment have somewhat increased.  Asset quality in the industrial sector has increased across all sub-sectors, according to the report.

In these difficult times, the Indian economy has shown stability and resilience. The momentum of growth is increasing with the strengthening of domestic demand conditions, strong public investment in infrastructure, smooth funding of the financing needs of businesses and households, and business optimism. Despite numerous global headwinds, the country is positioned to be among the fastest growing major economies. For both manufacturing and services, India's purchasing managers' indices (PMIs) continue to perform better than regional and international indices. The Indian economy is anticipated to expand by 6.5 percent between 2023 and 2024, with current risks being evenly distributed, the report said.

Source: Reserve Bank of India

The RBI report in its report mentioned that the Indian banking sector is in good health, supported by long-term low non-performing loan rates and enough capital and liquidity buffers. Gross non-performing assets (GNPA) and net non-performing assets (NNPA) ratios for the system as a whole have dropped precipitously from highs of 11.5 percent and 6.1 percent in March 2018 to 3.9 percent and 1 percent in March 2023, respectively. Additionally, the provisioning coverage ratio (PCR), which peaked at 74.0 percent in March 2023 after falling as low as 40.1 percent in June 2016. Bank deposits grew by 10 percent (y-o-y) in 2022-23 and improved to 11.8 percent in early June 2023, partly aided by the announcement of withdrawal of 2000 bank notes from circulation.

To determine how well SCBs' balance sheets can withstand unexpected shocks from the macroeconomic environment, macro stress tests are run. These experiments aim to evaluate capital ratios over a one-year horizon in two adverse (medium and severe) situations in addition to the baseline scenario. Stress test results reveal that SCBs are well capitalised and capable of absorbing macroeconomic shocks over a one-year horizon even in the absence of any further capital infusion.

The share of large borrowers in gross advances of SCBs declined successively over the past three years (from 51.1 percent in March 2020 to 46.4 percent in March 2023) as retail loans grew faster than borrowings by corporates. The share of large borrowers in the GNPAs of SCBs also came down substantially (from 75.7 percent in March 2020 to 53.9 percent in March 2023).

Talking about the primary urban cooperative banks (UCB), their credit growth (y-o-y) increased from 3.4 percent in September 2022 to 5.7 percent in March 2023.

The Reserve Bank of India (RBI) publishes the Financial Stability Report (FSR) every two years. The Financial Stability Report (FSR) reflects the Sub-Committee of the Financial Stability and Development Council's (FSDC) collective evaluation of the financial system's resilience and risks to financial stability. According to the research, the nation's financial system is still secure despite weakening domestic economy and risks from geopolitical and economic developments throughout the world.