Economy remains resilient, banking system fortified by low level of NPAs: RBI

The Indian economy remains resilient on the back of a healthy banking system, which has been bolstered by multi-year low levels of NPA and adequate capital, according to the reserve bankFinancial Stability Report (FSR).

The document reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Board (FSDC) on risks to the financial stability and resilience of the Indian financial system.

In exporting the report, Reserve Bank Governor Shaktikanta Das He said that the Indian economy has made a strong recovery and is among the fastest growing large economies despite growing uncertainty and massive headwinds. He added that financial stability is not negotiable and all stakeholders in the financial system must work to maintain it at all times.

“The Reserve Bank and other financial regulators remain steadfast in their commitment to safeguarding financial stability in the face of potential and emerging challenges,” he said in an introduction to the Financial Stability Report (FSR).

global economic uncertainty

The global economy faces increasing uncertainty amid the fragility of the banking system in some countries, persistent geopolitical tensions, and moderate but high inflation, according to the report. Despite global headwinds, the Indian economy and domestic financial system remain resilient, supported by strong macroeconomic fundamentals.

The resilience of the global financial system has been tested by the recent banking turmoil and the interaction between monetary policy tightening and financial sector pressures. Uncertainty has increased about the global macro-fiscal outlook.

“Against this backdrop, the Indian economy and domestic financial system remain resilient in an environment of macroeconomic and financial stability. The health of the Indian banking system is strong, supported by non-performing loans at a multi-year low and an adequate level of capital and liquidity,” he said.

FSR also said the health of the banking system is positive in this environment, with improved profitability and asset quality, adequate capital levels and precautionary liquidity.

System-wide total non-performing assets (GNPA) and net non-performing assets (NNPA) ratios fell sharply from 11.5% and 6.1% in March 2018 to 3.9% and 1.0% in March. 2023 in a row. Besides, the benefit coverage ratio, which was as low as 40.1 percent in June 2016, improved to 74.0 percent in March 2023.

Improve profitability and asset quality

The report further stated that the profitability of the banking system improved, with the return on assets increasing to 1.1 percent in 2023 from 0.2 percent in 2018.

This, in turn, helped the capital to risk-weighted asset ratio (CRAR) to reach a record high of 17.1 percent in 2023.

“Healthier balance sheets spur a sustained and broad-based recovery in credit growth momentum, with improved credit flows to all sectors of the economy,” the RBI said.

FSR said bank deposits grew by 10 percent (YoY) in 2022-23 and improved to 11.8 percent in early June 2023, helped in part by the announcement of the withdrawal of the ₹2,000 banknote from circulation.

“Although deposits have lagged behind the rate of credit expansion, the structural liquidity mismatch has been narrowing and the annual credit-increasing deposit ratio has fallen from its recent peak of 141.8 percent in November 2022 to 94.7 percent in June 02. ) in 2023.

Retail loans grew at a compound annual growth rate (CAGR) of 24.8 percent from March 2021 to March 2023, nearly double the 13.8 percent compound annual growth rate for total advances over the same period. It accounted for about a third of the total loans and advances of the banking system.

She said that since the last release of the Global Financial Stability Report in December 2022, the global and Indian financial systems have charted somewhat different paths, adding that the global financial system has been affected by great pressures since early March 2023 from banking turmoil in the United States and Europe. .

Stay committed to a stable financial system

In contrast, the report said, India’s financial sector was stable and resilient, as reflected in sustained growth in bank credit, low levels of non-performing assets, adequate capital and liquidity buffers.

The balance sheets of the banking and corporate sector have been strengthened, creating a ‘dual balance sheet advantage’ for growth, Das said, adding that the scope and depth of financial intermediation is being supported by technology and increasing digitization, which provide new opportunities for growth and financial inclusion. .

As the recent banking turmoil in some advanced economies (AEs) indicates, new risks have necessitated a reassessment of global standards on financial sector regulations, he said.

He said that while international cooperation between regulators on these issues is of paramount importance, as far as India is concerned, both regulators and regulated entities need to stay the course with an unwavering commitment to ensuring a stable financial system.

We must remember, he said, that seeds of weakness are often sown in good times when risks are overlooked. He added that international cooperation and regulatory focus are also necessary to address other challenges, such as cyber risks and climate change.

Through its G20 presidency, India is striving to improve the effectiveness of multilateralism in many of these areas. These efforts are aptly captured in the G20 India theme: One Land, One Family, One Future.