Banks' asset quality improves to decadal high at end-Sept: RBI report

Indian banks' gross non-performing asset (GNPA) ratio continued to improve in the second quarter of the current financial year, easing to a fresh decadal low, a Reserve Bank of India report published on Wednesday showed.

The improvement in the asset quality of banks that began in 2018-19 continued into the first half of 2023-24, with the GNPA ratio falling to 3.2% at end-September from 3.9% at end-March, the RBI said in its 'Trend and Progress of Banking' report.

The central bank said the banking system and the non-banking financial companies (NBFCs) remain resilient, backed by high capital ratios, improved asset quality and robust earnings growth.

"This is supporting double-digit credit growth and domestic economic activity," the RBI said.

"Sustaining this improvement requires further strengthening of governance and risk management practices and building up of additional buffers."

The GNPA ratio remained the highest for the agricultural sector and the lowest for retail loans, the report showed.

The consolidated balance sheet of commercial banks grew by 12.2% in 2022/23, the highest in nine years, driven mainly by credit growth expanding at its fastest pace in more than a decade, the report said.

During 2022/23, the total amount of frauds reported by banks declined to a six-year low, while the average amount involved in frauds was the lowest in a decade, the RBI said.

Even NBFCs' balance sheets expanded at a fast pace in 2023/23, led by double-digit credit growth.

However, notwithstanding the overall robust health of the sector, certain concerns remain, the central bank warned.

Given the strategic importance of NBFCs in the financial system, the high level of interconnectedness between banks and non-banks merits close attention, it said.

"Although banks are well-capitalised, they need to constantly evaluate their exposure to NBFCs as well as the exposure of individual NBFCs to multiple banks," it added.

NBFCs on their part should focus on broad-basing their funding sources and reduce over-dependence on bank funding.

"Overall, banks and NBFCs need to further strengthen their balance sheets through robust governance and risk management practices to meet the growing aspirations of the Indian economy."