“In a nutshell, the Indian financial sector is standing at crossroads: while the immediate impact of the fallout of Covid-19 will dominate the short-term, larger challenges relating to climate change and technological innovations will need a carefully crafted strategy,” the banking regulator noted in the Report on Trend and Progress of Banking in India released Tuesday. “The Reserve Bank will endeavour to ensure a safe, sound and competitive financial system through its regulatory and supervisory initiatives.”
The RBI also noted that the data available so far indicate that banks’ gross as well as net non-performing assets (NPAs) have moderated while provision coverage ratios, capital buffers as well as profitability indicators have improved relative to pre-pandemic levels. As per data available with the RBI, the moderation in GNPA ratios of banks that began in FY20, reached 7.3% by end-March 2021. Provisional supervisory data suggest a further moderation in the ratio to 6.9% by end-September 2021. Despite the marked improvement in asset quality indicators, the regulator sounded a word of caution.
“Credit growth is muted, indicative of pandemic scarring on aggregate demand as also risk aversion of banks. Banks’ asset quality may get dented, going forward,” the RBI noted. “In India, most pandemic measures had a well-specified sunset clause, and some have run their course during the year. However, the impact of these transient measures on banks’ financial health is not immediately clear and can be fully fathomed only after passage of time.”
Despite all public and private sector banks maintaining a capital conservation buffer of well over 2.5%, the regulator noted that banks will need to shore up their capital base.
“Going forward, banks would need a higher capital cushion to deal with challenges on account of the ongoing stress experienced by borrowers as well as to meet the economy’s potential credit requirements,” the RBI said. “Concerted strategies for timely capital infusion need to be carried forward by the banks.”
As it starts unwinding Covid relief measures pertaining to restructuring of borrower accounts, banks might require higher provisioning cover in some recast assets, the banking regulator said. In relation to NBFCs, the RBI noted a deterioration in asset quality. “The latest data on SMA (special mention account) show that potential NPAs have increased significantly during 2021-22 so far. Recognising the increasing importance of NBFCs in the financial ecosystem, the Reserve Bank has implemented scale-based regulation to enhance the regulatory oversight over the sector effective October 2022,” it said. “Going forward, the sector may have to grapple with higher delinquency as and when policy measures unwind.”
SMAs refer to accounts that indicate signs of turning into bad assets. Indian banks will need to adapt quickly to the changing nature of the industry. “The changing nature of banking — especially the increasing use of technology — presents challenges as well as opportunities for an inclusive and sound banking sector and the regulatory and supervisory function needs to keep pace,” the RBI said in the report.