Context: According to the Reserve Bank of India’s (RBI’s) report titled ‘Trend and Progress of Banking in India’, The Asset Quality of banks have improved to the highest in a decade.
RBI Report on Asset quality of Indian banks
- Gross Non-Performing Assets (GNPA): The GNPA ratio of Indian scheduled commercial banks (SCBs) went on improving, dropping to a fresh decadal low.
- The GNPA ratio of SCBs fell to a decadal low of 3.9% at end-March 2023 and further to 3.2% at end-September 2023.
- About 45% of reduction in GNPAs of SCBs was contributed by recoveries and upgradations.
- The consolidated balance sheet of scheduled commercial banks (SCBs) in 2022-23 expanded by 12.2 per cent
- It was driven by credit to the retail and services sectors.
- The deposit growth also picked up, although it trailed credit growth.
- The capital to risk weighted assets ratio (CRAR) of SCBs was 16.8 per cent at end-September 2023, with all bank groups meeting the regulatory minimum requirement and the common equity tier 1 (CET1) ratio requirement.
- Higher net interest income and lower provisioning boosted net interest margin (NIM) and profitability in 2022-23.
- Urban Co-operative Banks(UCBs): The combined balance sheet of UCBs expanded by 2.3 per cent in 2022-23, driven by loans and advances.
- Their capital buffers and profitability improved through 2022-23 and Q1:2023-24.
- Non-Banking Financial Companies (NBFCs): The consolidated balance sheet of NBFCs expanded by 14.8 per cent in 2022-23,
- It was led by double digit credit growth.
- Profitability and asset quality of the sector also improved in 2022-23.
- The sector remained well-capitalised with CRAR higher than the regulatory requirement.
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About NPAs:
- NPA or Non Performing Assets are those kinds of loans or advances that are in default or in arrears.
- In India, the timeline given for classifying the asset as NPA is 180 days.
- This is against 45 to 90 days of international norms.
GNPA:
- It is an absolute amount.
- It tells us the total value of gross non-performing assets for the bank in a particular quarter or financial year as the case may be.
Capital to Risk Weighted Assets Ratio (CRAR):
- CRAR is also known as Capital Adequacy Ratio (CAR)
- It is the ratio of a bank’s capital to its risk.
- It is arrived at by dividing the capital of the bank with aggregated risk-weighted assets for credit risk, market risk, and operational risk.
- CRAR is decided by central banks and bank regulators
- In order to prevent commercial banks from taking excess leverage and becoming insolvent in the process.
- The Basel III norms stipulated a capital to risk-weighted assets of 8%.
- In India, scheduled commercial banks are required to maintain a CAR of 9%.
- Indian public sector banks are required to maintain a CAR of 12%.
- The higher the CRAR of a bank the better capitalized it is.
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Way Forward
- Banks must guard against credit losses
- Higher capital buffers and provision coverage ratio (PCR) can provide cushions.
- In addition to regulatory capital and liquidity requirements, qualitative metrics such as enhanced disclosures, strong code of conduct and clear governance structures would contribute towards financial stability.
- Given the increasing interconnectedness between banks and NBFCs, NBFCs should focus on broadbasing their funding sources and reduce overdependence on bank funding.
- Banks and nonbanks both need to bring in greater empathy in their customer services.
- The banks and NBFCs must further strengthen their balance sheets through robust governance and risk management practices to meet the growing aspirations of the Indian economy.
- Special attention of all stakeholders to protect the banking system and the payments system from the risks of fraud and data breaches emanating from cyber threats is needed.
Also Read: RBI Announces Establishing Cloud Computing For Financial Institutions
News Source: TH
December 28, 2023