Some concerns in upbeat RBI report

Profitability of Indian banks is on the rise, but small borrowers are under stress.

The Reserve Bank of India’s (RBI) Financial Stability Report has presented a healthy picture of the Indian banking system. It has noted the improved performance of banks in various segments and on several parameters, especially asset quality.

Bad loans fell to a 12-year low of 2.6 per cent in September 2024. The net non-performing assets were at 0.6 per cent of the book. For years, Indian banks, especially the ones in the public sector,  had suffered from poor and declining asset quality, requiring fresh capital infusion and writing off of bad loans.

So the latest disclosures are welcome. Banks have also shown an increase in profitability. Most banks will remain well capitalised and healthy even if the macroeconomic environment worsens.  

While this is a positive, there is cause for concern in some areas. The unsecured retail loan book has shown weakness, with an increase in write-offs. The RBI said this could be because of asset quality degradation in the segment and a dilution of underwriting standards.

The unsecured loan book has accounted for a large part of the new loans in the retail segment. The microfinance sector, which tends to cater to low income households, has seen weakness. There is high indebtedness among borrowers with multiple loans.

Consumer credit below a particular threshold and gold loans showed stress. What is clear from all this is that the part of the economy that consists of small borrowers is not doing well.

So the report is as much a comment about the financial status of ordinary persons as about the banks that deal with them. This should be seen with the fact that bad loans among large borrowers have shown a declining trend, which shows that the economically better segments of society are not experiencing as much stress as the weaker sections. 

The report has forecast a GDP growth of 6.6 per cent in 2024-25, though it had recently fallen to 5.4 per cent. There is hope that an increase in rural consumption, higher government consumption, and savings and strong services exports will support better growth. Inflation may become moderate, but how much support monetary policy can give to growth will continue to be a question.

It expects the investment scene to be better, with corporates reporting better results. But the vulnerabilities arising from stretched equity valuations and irrational exuberance of market participants exist.

India should also be prepared for adverse geo-political situations, and protective trade and industrial policies as pursued by other governments. The report sounds a warning about rising global public debt which can pose a risk to the international financial system.