RBI suggests that banks should have stronger financial positions

Indian banks and non-bank lenders must strengthen their financial foundations through improved governance and risk management, as highlighted by a report released by the Reserve Bank of India (RBI) on Wednesday. Despite praising the industry’s overall performance, the report emphasized the need for these measures to meet the growing economic aspirations of India.

The report noted the Indian banking system’s favorable position for further enhancement, citing better asset quality, high capital adequacy, and robust profitability. Non-banking financial companies (NBFCs) are also expected to strengthen, supported by sufficient capital, increased provisions, and improved asset quality.

In the fiscal year 2022-23, scheduled commercial banks (SCBs) saw a remarkable 12.2% growth in their consolidated balance sheets, the highest in nine years. The growth was primarily driven by accelerated bank credit expansion, marking its fastest pace in over a decade. While deposit growth increased, it lagged behind credit growth, leading to higher reliance on borrowings.

Banks experienced a surge in non-food credit growth at 15.4% in 2022-23, propelled by the insatiable demand for loans among individual borrowers in India. As of December 1, 2023, non-food credit growth stood at 20.9%, with the momentum continuing into the current fiscal year.

RBI recently mandated higher risk weights on unsecured loans, applicable to both banks and non-banks, aiming to address potential risks. The report highlighted that over 50% of loans from foreign banks are unsecured, while private banks and public sector banks have lower proportions at 27.3% and 22.6%, respectively. These measures are crucial to ensure the stability and resilience of India’s financial sector.