Open Forum

New Delhi, 12 April 2023

Banking Sector

ALERT, SHOWING RESILIENCE

By Dhurjati Mukherjee

The Indian banking system is quite strong with both Prime Minister Modi and the Reserve Bank of India Governor, Shaktikanta Das, reiterating the claim in the backdrop of global concern after the US banking crisis spilled over to its stock market and rattled its bank stocks. While profitability is on the rise due to various factors, including better recovery, strict monitoring has changed the complexion of the banks, both state-run and private. In fact, the smaller banks are also quite active in their operations. Moreover, the sector is upbeat as Ajay Banga is going to become the President of the World Bank.

“Right now, Indian banks are showing resilience compared to their US counterparts and that largely has to do with their current capital levels, healthy asset quality and strict monitoring by the regulator”, observed Anil Gupta, Senior Vice President and co-group head for financial sector at ICRA rating agency. In fact, after two large bank failures in the last three years, India has raised the limit of insurance cover for depositors in insured banks from the earlier level of Rs 100,000 ($1211) to Rs 500,000 per account.

Indian lenders are capable of enduring any potential contagion effects emanating from the US banking turmoil and the recent UBS takeover of the embattled Swiss lender Credit Suisse, given their manageable exposures to their global counterparts, observed S&P Global Ratings. “Strong funding profiles, a high savings rate and government support are among the factors that bolster the financial institutions we rate”, the rating agency stated. S&P also said Indian banks had sufficient buffers to withstand losses on their sizeable government securities portfolio due to rising interest rates. Even bank credit as on March 24 stood at Rs 136.8 lakh crore, an increase of over Rs 17.8 lakh crore from a year earlier.  

As is well known, to tackle inflationary conditions in the economy, the RBI has increased the policy repo rate by 250 basis points since May last year. Analysts have said that Indian banks are now in a better position to withstand stress given their current capital levels and healthy asset quality and thus there has been no increase in repo rate this month.

Meanwhile, what is heartening to know is the fact that gross non-performing assets to total advances ratio for Indian banks have been on a declining trend since hitting a high of 16.8 percent in September 2018. It fell from 5.9 percent in March 2022 to a little over 5 percent in September 2022 and 5.53 percent in December 2022. In fact, all PSBs are in profit with aggregate profit being Rs 66,543 crore in 2021-22 and that further increased to Rs 70,167 in the first nine months of the current fiscal, stated Minister of State for Finance Bhagwat K. Karadrecently in a written reply in the Lok Sabha. He added that major banking reforms undertaken by the government over the last eight years addressed credit discipline, responsible lending and improved governance, besides adoption of technology, amalgamation of banks and maintaining general confidence of investors.

Meanwhile, the Finance Ministry has asked state-run lenders to adopt stricter monitoring of top corporate loan accounts and submit a plan to deal with business risks in key areas within two weeks. Indian banks, in the past, have had to take deep haircuts on their exposure to debt-laden companies admitted under the bankruptcy legislation. Banks were also asked to monitor the mark-to-market impact on their trading books amid rising interest rates and maintain their liquidity ratios. These are signs that the government is determined to stop bad loans through stronger monitoring to increase profitability of banks.

Further, enhanced spending on infrastructure, speedy implementation of projects and continuation of reforms are expected to provide further impetus to the banking sector. All these factors indicate positive growth as rapidly growing businesses will turn to banks for their credit needs. The advancement of technology has further helped banks in operational efficiency, and this may also lead to increased profitability. In recent years, India has experienced a rise in fintech and micro financing. India’s digital lending stood at US $75 billion in FY18 and is estimated to reach US 1trillion by FY23, driven by five-fold increase in digital disbursements.

Added to all this, the current measures including amalgamation of weak banks has further given a boost to the banking sector. In spite of all scandals of the rich siphoning bank funds, it is also a fact that the outreach of banks has increased considerably, and small traders and manufacturers are getting loans. For example Mudra loans are being given to very small entrepreneurs at very low rates of interest.

Though privatisation has been quite successful, there is need for operational autonomy and governance among the public sector banks.  These PSU banks should become board-driven and regulated by the RBI, which has been recommending these changes along with the Indian Banks’ Association (IBA). One area where reform is likely involves PSU banks’ bad loans. With the formation of a national asset reconstruction company, the problem is expected to be solved in the coming years. Lenders would have to agree to the transfer, but it is in their interest to do so, since for potential buyers of the troubled loans, dealing with just one holder would be easier and encourage a resolution to the problem.

On the digitisation front, India has been moving quite fast in the past two-three years or so. It has many financial technology companies in the payment space and in the distribution of financial services products. One successful innovation has been the Unified Payments Interface, or UPI, developed by the National Payments Corporation of India. Regulated by India’s central bank, it’s an instant real-time payment system allowing mobile users to transfer funds between banks.

At all banks, going digital is becoming core to all their services as well as the lending business. Currently, for example, around 70 percent of transactions in major banks such as the State Bank of India are conducted through digital channels. Collaboration among banks and fintech companies is sure to produce even more innovation in the next few years as advances are made in artificial intelligence, machine learning, and data analytics.

The strength of Indian banks augurs well for the economy. However, banks need to make further inroads into rural areas and help small and medium farmers and traders to increase their earnings. Moreover, the cooperative banks and the regional rural banks (RRBs) must improve their finances and reach out to the community in a bigger way. It goes without saying that bank finance would help the rural populace to expand their business in a better manner and reduce the urban-rural divide. ---INFA

(Copyright, India News & Feature Alliance)