Banks show impressive improvement in asset quality: RBI report

The asset quality of the banks has improved significantly marking a fresh decade-long low in the gross non-performing asset (GNPA) ratio, according to the latest data from the Reserve Bank of India (RBI).  According to the RBI's 'Trend and Progress of Banking' report released on Wednesday, the GNPA ratio for banks declined to 3.2 per cent as of end-September, down from 3.9 per cent recorded at the close of the previous fiscal year in March.

The trajectory of asset quality improvement that commenced in the financial year 2018-19 has persisted into the first half of 2023-24. The central bank underscores the resilience of both the banking system and non-banking financial companies (NBFCs), attributing this to elevated capital ratios, enhanced asset quality, and robust earnings growth.

Highlighting the broader economic implications, the RBI noted that such stability underpins double-digit credit expansion and stimulates domestic economic activities. However, to sustain this positive momentum, the RBI emphasises the necessity for fortified governance structures, risk management protocols, and the accumulation of supplementary buffers.

Despite the overarching progress, certain sectors exhibit distinct patterns in asset quality. Notably, the GNPA ratio remains elevated for the agricultural segment while staying comparatively low for retail loans. Additionally, the consolidated balance sheet of commercial banks expanded by 12.2 per cent in the fiscal year 2022/23, marking its most robust growth in nine years.

Furthermore, the RBI's report indicates a decline in reported frauds by banks to a six-year nadir, accompanied by a decade-low average fraudulent amount. Concurrently, NBFCs witnessed accelerated balance sheet growth in 2022/23, propelled by double-digit credit expansion.

Nevertheless, the RBI cautions about persisting challenges. Given the pivotal role of NBFCs in the financial ecosystem, the intricate interdependencies between banks and non-banks necessitate vigilant oversight. The RBI advises banks to continually assess their exposure to NBFCs, while NBFCs should diversify their funding avenues beyond bank-centric sources.

(With Reuters inputs)