Indian Banking Sector Performance: RBI Report 2023-24

Summary: The Reserve Bank of India’s 2023-24 report highlights robust growth in the Indian banking sector, driven by strong credit expansion and asset quality improvements. The consolidated balance sheets of scheduled commercial banks (SCBs) grew significantly, with deposits increasing by 14% and advances by 19%. Asset quality reached a 13-year high, as the gross non-performing asset (GNPA) ratio dropped to 2.7% by March 2024. SCBs maintained strong capital buffers with a capital-to-risk weighted assets ratio (CRAR) of 16.9%, exceeding regulatory requirements. Profitability rose for the sixth consecutive year, with a 32.8% increase in net profit. Urban cooperative banks and non-banking financial companies (NBFCs) also showed improved asset quality and profitability. However, unsecured lending trends and top-up housing loans raised potential risks. The report detailed policy measures, including revised guidelines on credit, valuation standards, and consumer protection initiatives like faster credit processing for MSMEs. It also reviewed global banking developments, noting improvements in capital adequacy across jurisdictions. RBI’s focus on harmonizing prudential norms and improving governance underlined its commitment to financial stability. Comprehensive data, spanning six chapters, provides a deep dive into banking trends and challenges, emphasizing the sector’s resilience amidst global headwinds.

Reserve Bank of India is expected in terms of Section 36 (2) of the Banking Regulation Act, 1949,  to release the Report on Trend and Progress of Banking in India 2023-24. This Report presents the performance of the banking sector, including commercial banks, co-operative banks and non-banking financial institutions, during 2023-24.

Summary of the report:

• Credit of all banks increased substantially enabling the balance sheet of them to expand during 2023-2024
• The capital to risk weighted assets ratio (CRAR) of SCBs was 16.8 per cent at end-September 2024, with all bank groups meeting the regulatory minimum requirement and the common equity tier 1 (CET1) ratio requirement.
• Asset quality improved, with the gross non-performing assets (GNPA) ratio falling to its lowest in 13 years at 2.7 per cent at end-March 2024 and 2.5 per cent at end-September 2024. A dramatic improvement totally unexpected by anyone.
• Banks’ profitability rose for the sixth consecutive year in 2023-24 and continued to rise in H1:2024-25 with the return on assets (RoA) at 1.4 per cent and return on equity (RoE) at 14.6 per cent. A robust showing by any financial standard expectations.
• The combined balance sheet of urban co-operative banks (UCBs) expanded in 2023-24, with asset quality improving for the third consecutive year while capital buffers and profitability were strengthened. It is very pleasing since co-operative banks serve the rural poor and some of them failed miserably causing consternation among its depositors in the recent past.
• The non-banking financial companies (NBFC) sector exhibited double digit credit growth, while its unsecured lending contracted and asset quality improved further – the GNPA ratio dropped to 3.4 per cent at end-September 2024; strong capital buffers kept the CRAR well above the stipulated norm at end-September 2024.

Now let us study the whole report and understand the details.

Engulfed among the following 6 chapters, the report contains the interesting facts.

Chapter 1 Perspectives

Chapter 2 Global Banking Developments

Chapter 3 Policy Environment

Chapter 4 Operations and Performance of Commercial Banks

Chapter 5 Developments in Co-operative Banking

Chapter 6 Non-Banking Financial Institutions

Statistical delights from the year end data of the banks (Perspectives) page 25

• Banks’ profitability improved for the sixth consecutive year in 2023- 24, while their gross non-performing assets (GNPA) ratio reached its lowest level in 13 years at 2.7 per cent at end-March 20242. Banks’ capital position remained satisfactory, as reflected in key parameters like leverage ratio and capital to risk weighted assets ratio (CRAR). Strong credit expansion by NBFCs was accompanied by further strengthening of their balance sheets, improvement in credit quality and profitability, and satisfactory capital buffers.
• From Appendix Table IV.1: Indian Banking Sector at a Glance: Total deposits as the end of March 2024 stood at Rs 2,17,33,443 Crores showing an increase of 14.1%, advances stood at Rs 1,71,42,340 Crores with an increase of 19.1 %, net profit at Rs 3,49,603 Crores with an increase of 32.82%.
• Let us look at asset quality, which we bankers look at with curiosity. Gross NPAs at Rs 4,80,818 Crores with – 15.9% fall over the previous year. Gross NPA ratio at 2.8% a mighty fall from 3.9% with provision coverage ratio at 76.6% with an increase from 74.9%.
• What about sectoral disbursement of bank credit or loans in common parlance. Services with Rs 4592227 Crores constituting 23.5%, personal loans at 27.5%, agriculture 20.0 % increases respectively over the previous year 2023 March31.
• Interesting facts on top-up loans – With the extensive enhancement of loans by using housing loans facilities or increasing the limits without adherence to strict underwriting standards or due diligence, these loans my face build-up risks if the collaterals show a sharp decline. RBI advised the banks to exercise due caution and treat them as unsecured loans. If needed, RBI may initiate additional regulatory interventions.
• What else was covered in the first chapter named perspectives without getting into too much details?
• The Payments Vision 2025 emphasised the need to bring all significant payment intermediaries under direct regulation of the Reserve Bank. Details on foreclosure charges/pre-payment penalties on loans with new guidelines, payment and settlement systems, higher employee attrition with 25% indicating unsatisfactory HR practices, cheque truncation system, Internationalisation of Payment Systems, adoption of new technologies like digital lending, scaling up Unified Lending Interface, etc. were covered on pages 26-30.

Now the new stimulating information on global banking developments (page 33)

Some statistical evolutions

Nonperforming loan ratio: For advanced economies, it ranged between 0.45% and 0.98% among countries like US, UK, Cananda, Australia, Denmark etc. For Euro areas, it ranged between 1.27% to 5.96% among the nations Belgium, France, Greece, Iceland, Netherlands and Spain. Greece with 35.7% in 2015 has sharpened it to 5.96% in 2023.

What about Emerging Markets and Developing Economies?

India with 5.88%, 9.23%, 7.94%, 6.54%, 4.81%, and 1.72% has shown a turbulent performance over the years 2015-2023. But its latest information for 2024 is not at all available showing some concern among the scholars.

For others, Argentina with 3.55% showing the highest sign of uncomfortable level to plus 2.0 level for Brazil, Thailand, and Mexico showed NPL ratios. Indonesia and China join India in 1.0 plus levels.

Bank profitability

The profitability (return on assets (RoA)) of banks across most jurisdictions showed mixed movements in response to higher interest rates. In some countries, such as the US and Türkiye, banks’ profitability moderated as high policy rates increased their borrowing costs while also impacting credit demand.

In some other jurisdictions, however, banks’ profitability increased due to a variety of reasons. For example, the RoA of UK banks improved in 2023 on higher net interest income (NII), reduced provisions and moderate cost escalations. In Euro area, Greece showed remarkable increase due to reduced borrowing costs.

Capital adequacy

Overall position showed improved position among the banks. Among AEs, the Scandinavian countries like Norway and Denmark continued to maintain higher capital buffers than their peers. The capital to risk-weighted assets ratio (CRAR) of US banks improved in 2023 and Q1:2024. The ratio of UK banks remained elevated.

Among Euro countries, Spain showed remarkable improvement while that of Belgium and Netherlands declined though within the stipulated level.

Regulatory Capital to Risk-weighted Assets Ratio

Among 20 countries’ data available, 6 showed 20.0 plus levels (one in 30.0 level), 11 showing 10.00 levels while for 2 no information is available. The said ratio for China was the lowest at 15.06%, followed by India at 15.59% while US equally joined them at 15.90%.

Global Banking Policy Developments

The following developments on the regulatory fronts were taken.

1. For prudent regulation and effective supervision, As of September 2024, one-fourth of Financial Stability Board (FSB) member jurisdictions had fully implemented the final elements of Basel III. Since end-September 2023, around half of the 27 member jurisdictions have published the final rules for the revised credit risk, market risk and operational risk standards as well as the output floor.

2. Implementation of the G20 over the-counter (OTC) derivatives reforms has progressed well in major jurisdictions over the years.

3. In April 2024, the BCBS issued a consultative document with guidelines for counterparty credit risk (CCR) management to replace the 1999 guidelines

What about the world’s largest banks?

Among 100 banks, advanced economies occupied 62 %, followed by 33 % by Euro nations and 5 % by less developed or developing nations. Yes, China has 21 banks followed by US at 13 banks, and India at 3 banks with adequate scope to grow.

RBI – Policy Environment (page 50)

RBI is definitely following up its tradition of detailed study of its policy environment.

Let me encapsulate the central summary of RBI to start with our discussion.

“In India, the monetary policy stance was changed from ‘withdrawal of accommodation’ to ‘neutral’ in October 2024. The regulatory and supervisory policies of the Reserve Bank focused on strengthening risk management practices, harmonisation of prudential guidelines and addressing emerging risks. The Reserve Bank continued its efforts to improve customer awareness and financial inclusion, while enhancing emphasis on good governance and transparency.”

Now, the detailed history over the years.

The Indian financial system demonstrated sustained resilience during 2023-24 and 2024-25 against the backdrop of formidable global headwinds

Mindful of the persistence of inflation above the target, the monetary policy committee (MPC) kept the policy repo rate unchanged at 6.50 per cent during 2023- 24 and 2024-25 (up to December 2024) after a cumulative hike of 250 basis points (bps) during 2022-23.

On October 9, 2024, the MPC decided to change the monetary policy stance from ‘withdrawal of accommodation’ to ‘neutral’ based on its assessment of the evolving inflation-growth dynamics.

Further, the average daily net absorption under the LAF (Liquidity Adjustment Facility) stood at ₹0.65 lakh crore during 2024- 25 (up to December 17, 2024). While average daily absorption under the SDF (Standing Deposit Facility) and reverse repos was ₹1.3 lakh crore, the recourse under the MSF (Marginal Standing Facility) averaged ₹0.07 lakh crore.

A much-awaited welcome development. Domestic bond yields eased further in 2024-25, reflecting positive sentiment following the inclusion of Indian government securities (G-secs) in the global bond index. This opens up the free flow of foreign capital into India for investment, development or due participation in stock markets.

What were the supervisory or regulatory policies initiated by RBI?

• On 30.04.2024, guidance notes on operational risk management and operational resilience to align with Basel committee on banking supervision.
• On July 15, 2024 the Reserve Bank issued master directions on fraud risk management for REs (Regulated Entities).
• On August 5, 2024 the Reserve Bank issued a draft circular to ensure prudence and robustness in the use of various models by REs in their credit management.
• Regulatory Measures towards Consumer Credit and Bank Credit to NBFCs:
• REs were advised to review their exposure limits for consumer credit and put in place board-approved limits for the various sub-segments, specifically unsecured consumer credit exposures, by February 29, 2024.
• Bulk deposits: On June 07, 2024 the Reserve Bank revised the definition of bulk deposits to single Rupee term deposits of ₹3 crore and above for SFBs and SCBs.
• Credit Card and Debit Card: On March 07, 2024, to meet the fast-changing economy, the Reserve Bank amended its master direction on credit and debit cards.
• Classification, Valuation and Operation of Investment Portfolios of Commercial Banks: Revised guidelines to value the investments of banks in tune with the global standards, on September 12, 2023.

An important development:

Wilful and Large Defaulters: The existing instructions on wilful and large defaulters were reviewed, and final master directions were issued on July 30, 2024. In addition to SCBs, scheduled UCBs, HFCs and AIFIs, the framework has been extended to NBFC-middle and above layers, non-scheduled urban co-operative banks (UCBs) in Tier 3 and 4, LABs and RRBs.

What about the financial markets, the back bone of the Indian economy which survived the tumultuous vagaries of inflow/sudden outflow of foreign financial institutions investments and fitting investments of local Indian investment public or institutions like mutual funds who made huge valuations of their investments?

• The measures undertaken by the Reserve Bank during the period under consideration included, inter alia, rationalisation of directions on money market products;
• review of regulatory framework for hedging foreign exchange risks; mandating exchange of initial margin for noncentrally cleared derivative (NCCD) transactions; and
• putting in place a framework for recognition of SROs in financial markets.
• Additionally, direct access to the Negotiated Dealing System – Order Matching (NDS-OM) platform was expanded to include a larger set of REs. (Regulated Entities)
• Instructions on derivatives were driven by huge investments by individuals including the college students without adequate technical knowledge or patience to learn the fundamentals.

Now the consumer protection

Internal Ombudsman (IO) for Regulated Entities III.40 On December 29, 2023 the Reserve Bank issued master direction harmonising the instructions applicable to various REs in the IO mechanism.

Revised guidelines on Lending to Micro and Small Enterprises (MSEs): On June 11, 2024 the Reserve Bank updated master directions on lending to micro, small and medium enterprises (MSMEs), mandating that the time taken for credit decisions for loans up to ₹25 lakh to MSE borrowers should not be more than 14 working days. This was done to meet the credit requirements of MSE units which engage the largest number of employees around the country.

Collateral-free Agriculture Loan – Enhancement of Limit:

The Reserve Bank, on December 6, 2024, announced an increase in the limit for collateral-free agriculture loans from ₹1.6 lakh to ₹2 lakh per borrower to further enhance credit availability for small and marginal farmers. A genuine demand long waited for action.

Consolidated Balance Sheet of Scheduled Commercial Banks (At end-March)

Now the statistics pertaining to SCBs with deposits, advances, profits, etc.

Amounts in Crores

Soundness indicators

Capital Adequacy: The minimum capital to risk-weighted assets ratio (CRAR) requirement for banks in India is set at 9 per cent [11.5 per cent inclusive of capital conservation buffer (CCB)]and Tier 1 capital requirement is set at 7 per cent, both one percentage point above the Basel III requirements.

At end-March 2024, all bank groups remained well-capitalised, although the CRAR of SCBs moderated by 30 bps to 16.9 per cent while Tier 1 capital stood at 14.8 per cent.

What about Leverage ratio and Liquidity Coverage Ratio

During 2023-24, banks’ consolidated balance sheet expanded at a healthy pace, with robust deposit and credit growth. Broad-based credit growth was led by personal loans and services sectors.

Banks’ profitability improved, while liquidity and provision buffers remained comfortable. Lower slippages helped strengthen asset quality across the board.

The share of unsecured advances in total advances declined, reflecting the Reserve Bank’s measures to contain build-up of risk in these sectors.

Pages 61-113 under chapter 5 covers developments in co-operative banks, and pages 114-146 covers Non-Banking Financial Institutions. Any one interested in these areas can easily refer to the main report containing 228 pages and study them in details.

Conclusion

The report is treasure house of 6 chapters, 124 charts, and 160 tables/appendix tables. The reader interested in the growth of all institutions like SCBs, cooperative banks, NBFC or various financial institutions involved with the latest fin-tech instruments may read the whole report of 228 pages and appreciate the enormous stride made by these institutions in spite of the strong inflationary trends in the international trade/finance. A serious study is a must to understand the vast growth achieved under various heads of banking.

A friendly advice

My article is an appreciation from my point of view and does not constitute any legal advice/financial consultation.

Reference

https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/0RTP261220247FFF1F49DFC04C508F300904A90C7439.PDF