The gross non-performing asset (GNPA) ratio of scheduled commercial banks (SCBs) fell to a seven-year low of 5% and net non-performing assets (NNPA) dropped to a 10-year low of 1.3% in September 2022, shows the financial stability report (FSR) released by the Reserve Bank of India (RBI).
In his Forward, RBI governor Shaktikanta Das says, "Global financial system has been impacted by significant strains since early March 2023 from the banking turmoil in the US and Europe. In contrast, the financial sector in India 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. The reach and depth of financial intermediation are being aided by technology and growing digitalisation, which provide new opportunities for growth and financial inclusion," he added.
According to the FSR, network analysis indicates that the total outstanding bilateral exposures among constituents of the financial system continued to grow. "SCBs have the largest bilateral exposures in the Indian financial system, although their share declined in March 2023. A simulated contagion analysis shows that losses due to the failure of five banks with the maximum capacity to cause contagion would not lead to the failure of any additional bank."
In March this year, SCBs bolstered their capital base, with the capital to risk-weighted assets ratio (CRAR) and the common equity tier 1 (CET1) capital ratio at historical highs of 17.1% and 13.9%, respectively, and have steadily enhanced their returns on assets (RoA) and returns on equity (RoE).
As of March 2023, the gross non-performing assets (GNPA) ratio of SCBs' continued its downtrend and fell to a 10-year low of 3.9% and the net non-performing assets (NNPA) ratio declined to 1%. The provisioning coverage ratio (PCR) rose to 74%. Led by strong growth in net interest income (NII) and a significant reduction in provisions, the profit after tax of SCBs registered a growth of 38.4% in 2022-23, the report says.
According to the FSR, 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.
In March 2023, the CRAR of urban cooperative banks (UCBs) rose to 16.5%, while that of non-banking finance companies (NBFCs) stood at 27.5%.
The solvency ratio of the insurance sector remains above the minimum threshold limit of 150%.
According to the report, regulatory efforts across the globe are focusing on improving financial system resilience amid the interaction between higher interest rates and weak internal risk management practices in banks.
"Addressing liquidity and leverage vulnerabilities in non-bank financial intermediaries (NBFIs) remains a policy priority. Intensifying supervisory efforts to close data gaps, identify emerging risks and initiate strong and appropriate actions are gaining attention. Risks to the financial system from climate change, digital finance and cyberattacks are other key focus areas," it says.
At the same time, according to the FSR, domestic regulatory priorities focus on improving financial institutions' safety and soundness, increasing the financial system's resilience to shocks and promoting financial system efficiency to ensure financial stability and support sustainable economic growth.
The latest systemic risk survey of RBI in May 2023 showed that risk across most categories that contribute to domestic systemic risk has receded. "Risk from global spillovers, however, remained in the 'high' risk category, with more than half of the respondents expressing falling confidence in the stability of the global financial system. Tightening of global financial conditions, global growth slowdown and volatility in capital flows were cited as major risks. About 94% of the respondents expressed confidence in the Indian financial system, with more than half of the respondents assessing improved domestic banking sector prospects over a one-year horizon," it added.