Banks’ better health is comforting news

The Reserve Bank of India (RBI)’s report on the banking sector for the year 2021-22, released last week, has sent out the welcome message that the sector, which is among the most important in the economy, is in better health now than in the past. According to the report, the sector has seen continuous improvement in most areas during the year. There is improvement in credit and deposit growth, capital adequacy ratios are satisfactory, and non-performing assets (NPAs) have declined. Banks have seen an expansion in their balance sheet at rates not seen in recent years. This has happened when governments have been finding it difficult to balance their budgets. The financial sector had earlier seen the ‘twin balance sheet crisis’ of a corporate sector overburdened with debt and the banking system weighed down by bad loans. But the banking sector seems to have emerged with some strength from there.

Credit growth was at a 10-year high at the end of September 2022. All types of loans, including working capital credit and term loans, have increased. That is a good sign for the economy. The RBI’s policies during the pandemic and its efforts to clean up the banks’ books helped in this. Both public sector banks (PSBs) and private banks improved their finances. Though the PSBs lost some market share to private banks, they still dominate the sector, and account for 62% of the deposits and 58% of the advances. Both have seen improvement in their capital position, asset quality, and leverage and liquidity positions. Capital adequacy increased from 14.1% in 2021 to 16%, and gross NPAs have declined from 11% in 2017-18 to around 5% at the end of September 2022. Various factors have contributed to the decline in bad loans, and it should be noted that they remain higher among the bigger industries than among the MSMEs.

The improvement in the working of banks has to be seen in the context of the slowdown of the global economy and the recessionary trends in some countries. But there are some areas of concern also. Deposit growth has lagged credit growth and that might make it difficult for banks to meet credit demand. High inflation levels may be discouraging depositors, and banks have to make efforts to attract more deposits. The RBI has advised the banks to ensure that there are no loan slippages. They have to keep NPAs under check. It has noted the banks have “weathered the pandemic, emerging more resilient and robust,” but the improvement has to be sustained in a global milieu which may be deteriorating.