Indian financial system demonstrated sustained resilience during FY24 and FY25

Posted on by

The Indian financial system demonstrated sustained resilience during 2023-24 and 2024-25 against the backdrop of formidable global headwinds, benefitting from a stable macroeconomic environment and an agile regulatory and supervisory framework, according to a Reserve Bank of India (RBI) report.

Specifically, the commercial banking sector exhibited sustained strength during 2023-24 and H1 (April-September): 2024-25. per RBI’s Report on Trend and Progress of Banking in India 2023-24.

Further, the consolidated balance sheet of scheduled commercial banks (SCBs) underwent double-digit expansion, led by robust year-on-year (y-o-y) credit growth of 20.2 per cent as on March-end 2024.

However, Banks’ credit growth moderated to 11.5 per cent y-o-y in the backdrop of RBI increasing risk-weights on their lending to segments like consumer durables, credit card receivables and lending to NBFCs in November 2023.

Asset quality improves

The report noted that Banks’ profitability rose for the sixth consecutive year in FY24 and asset quality improved further with the gross non-performing assets (GNPA) ratio falling to its lowest in 13 years at 2.7 per cent at end-March 2024 (down from 3.9 per cent at end-March 2023).

Moreover, the net NPA (NNPA) ratio also declined to a decadal low of 0.62 per cent at end-March 2024, driven by stronger provision buffers. Latest available supervisory data suggests that the GNPA and NNPA ratios improved further to 2.5 per cent and 0.57 per cent, respectively, as at end-September 2024.

Both PSBs (Public Sector Banks) and PVBs (Private Sector Banks) exhibited an increase in return on assets (RoA) in 2023-24. Gains in profitability of SCBs continued in H1:2024-25 with RoA at 1.4 per cent and RoE (Return on Equity) at 14.6 per cent, per the report.

Even as Indian banks are at the forefront of digitalisation, aiming to leverage technology for productivity and efficiency gains, the central bank cautioned that the risks of cyber attacks, digital frauds, data breaches and operational failures have also increased.

It emphasised that going forward, there is a continuing need for banks to strengthen their risk management standards, IT governance arrangements and customer onboarding and transaction monitoring systems to check unscrupulous activities, including suspicious and unusual transactions

NBFCs: Double digit loan growth

For the Non-Banking Finance Company (NBFC) sector, growth in loans and advances accelerated to 18.5 per cent in 2023-24 from 17.4 per cent in 2022-23, driven by upper layer NBFCs. RBI noted that aggregate credit continued to expand in double digits even though unsecured lending contracted at end-September 2024

NBFCs’ RoA increased to 2.9 per cent as at March-end 2024 against 2.6 per cent as at March-end 2023. RoE rose to 13 per cent against 12.3 per cent. Further, NIM (net interest margin) was up at 5.2 per cent against 4.6 per cent.

The asset quality of NBFCs across different classifications improved further in 2023-24, with GNPA declining to 3.5 per cent (from 4.5 per cent as as on March-end 2023), indicating effective resolution of bad assets.

NBFCs have also maintained adequate provisions against outstanding non performing assets (NPAs), resulting in this ratio declining to 1.1 per cent (1.6 per cent). This trend continued in H1: 2024-25, with gross NPA ratio declining to 3.4 per cent as at end-September 2024. NNPA ratio remained steady at 1.1 per cent.

RBI noted that going forward, besides the challenges emanating from cybersecurity threats, NBFCs need to be mindful of the evolving concentration risk and climate-related financial risks associated with credit to certain sectors.

Further, the dependence of NBFCs on banks remains high, notwithstanding some moderation; They need to further diversify their sources of funds as a risk mitigation strategy.

The central bank warned NBFCs that an imprudent ‘growth at any cost’ approach would be counter-productive, and a robust risk management framework should be implemented.

Moreover, they need to strengthen their initiatives to address customer grievances, adhere to fair practices and avoid recourse to usurious interest rates so as to ensure their relevance in a fast-changing financial landscape.