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RBI Financial stability report : What it tells about the banking sector

by Tavaga Invest

The global economy is facing multiple headwinds. While all the developed economies are facing recessionary fears, the Indian economy stands out due to sound macroeconomic fundamentals and resilience in the Indian financial sector. RBI in its latest Financial Stability Report gives us insights into how the Indian financial industry is doing better.

Banking Sector

Any economy needs a strong banking sector since it is one of the main places where people and companies may borrow money, invest it, and further boost the economy. The RBI’s Financial Stability Report has provided information on various crucial performance metrics for evaluating the state of the banking industry. Let us take a look at them.

  1. More deposits The ability of the bank to issue loans increases with the amount of deposits made with the bank. The overall growth rate of deposits at the bank, according to the report, is 9.4%.  
  1. More loans, more growth Credit growth is a major factor in a growing economy. Businesses from all industries that borrow money to upgrade their equipment produce more goods and services over time, which benefits the national economy as a whole. According to the report, the credit growth rate is at 17.4%.  This credit growth rate is at a level not seen in the last decade!
  1. More loans, but what about recovery? Loans are one of the most valuable assets of a bank. The borrower is required to repay the loan along with interest, But what if they do not?,  For this reason, we consider the quality of loans in addition to the loan book. We can assess the loan quality using the terms Gross Non-Performing Asset (GNPA) and Net Non-Performing Asset (NNPA). These two will offer us a sense of the bank’s asset’s overall health. The proportion of total loans and advances issued that haven’t been repaid by the borrowers is known as the GNPA ratio. The report states that the current GNPA ratio was 5%, a 7-year low, and the NNPA ratio, which accounts for loss incurred by the bank as a result of non-loan recovery, was 1.3%, a 10-year low. Along with the GNPA ratio in each sector, it’s critical to consider the distribution of loans throughout the various sectors when assessing a bank’s asset quality. Every sector, per the report, saw a decreased GNPA ratio.
  1. What about the large borrowers? It is crucial to monitor the GNPA generated by big borrowers because a loan failure from one of them could put the bank in danger. According to the report, the total share in GNPA has come down from 75.6% to 62.2% in a span of 2 years. When we take a look at the top 100 large borrowers, we see that there is fresh borrowing in corporates, which is a sign of expansion. The GNPA share of these top 100 large borrowers dropped from 6.8% in March 2022 to 5.4% in December 2022.
  1. Are the banks profitable? Profit after tax of banks grew at 40.7% in September 2022, mainly due to an increase in the income from the interest of loans.

The RBI also conducted various stress tests to measure how the banks will fare in adverse conditions like growth reduced, inflation rising, global economy sputtering, etc. After running their models, RBI points to the fact that the banks are well-capitalized and capable of absorbing shocks under adverse situations. can withstand these circumstances without many problems.

But does that mean that party is on? 

While all these are reassuring that the Indian banking sector is in good health, some problems are yet to be addressed from the roots. For e.g. RBI could dissect these NPAs and separate out wilful defaulters from the ones due to adverse environments. The latter constitutes almost half of all the NPAs. Why this is important because the two needs to be dealt with separately. While wilful defaulters can be reduced with stricter laws and regulations, the latter can be reduced by making adequate and frequent reforms in archaic business laws. Only then will we be able to assess the true health of our financial sector. 


Ruchi Mehta


Disclaimer: This write-up is solely for educational purposes. This in no way should be construed as a buy/sell recommendation. Please consult your investment advisor before investing.

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