RBI Financial Stability Report: Bad loans fall to a decadal low in March

Since the last issue of the Financial Stability Report (FSR) in December 2022, the global and Indian financial systems have charted somewhat different trajectories. The global financial system has been impacted by significant strains since early March 2023 from the banking turmoil in the US and Europe," RBI Governor Shaktikanta Das said in the foreword of the FSR report.

Talking about the Indian financial sector, Das said it has been stable and resilient, as reflected in sustained growth in bank credit, low levels of non-performing assets, and adequate capital and liquidity buffers. Both banking and corporate sector balance sheets have been strengthened, engendering a 'twin balance sheet advantage' for growth.

Despite these heightened uncertainties and formidable headwinds, the Indian economy has made a solid recovery and is among the fastest-growing large economies. In this fragile global milieu, balancing the policy trade-offs, preserving macroeconomic and financial stability, shoring up confidence, and supporting sustainable growth are top priorities for policymakers the world over, the governor added.

Further, Das said, both regulators and regulated entities in India need to stay the course with an unwavering commitment to ensuring a stable financial system. It has to be remembered that seeds of vulnerability often get sown during good times when risks tend to get overlooked.

The RBI report noted macro stress tests for credit risk reveal that SCBs are well-capitalised and all banks would be able to comply with the minimum capital requirements even under adverse stress scenarios.

The capital-to-risk weighted assets ratio (CRAR) of urban cooperative banks (UCBs) rose to 16.5 percent in March 2023 while that of NBFCs stood at 27.5 percent. The solvency ratio of the insurance sector remains above the minimum threshold limit of 150 percent.

The report further said the banking system profitability improved with return on assets (ROA) increasing to 1.1 percent in 2023 from a low of - 0.2 percent in 2018. This, in turn, helped the capital to risk-weighted assets ratio (CRAR) 35 to reach a record high of 17.1 percent in 2023.

FSR said bank deposits grew by 10 percent (YoY) in 2022-23 and improved to 11.8 percent in early June 2023, partly aided by the announcement of the withdrawal of Rs 2000 bank notes from circulation.

"Although deposits have trailed the rate of credit expansion, the structural liquidity mismatch has been narrowing and the annual incremental credit-deposit (C-D) ratio has come down from its recent peak of 141.8 percent in November 2022 to 94.7 percent on June 02, 2023," the report said.

Retail loans grew at a compounded annual growth rate (CAGR) of 24.8 percent from March 2021 to March 2023, almost double the CAGR of 13.8 percent for gross advances during the same period. It formed around one-third of the total banking system's gross loans and advances.