Domestic credit growth remained subdued in recent years though there are incipient signs of improvement in the health of banks and the credit growth is picking up, noted Shaktikanta Das, Governor, Reserve Bank of India recently delivered a speech titled Indian Banking Sector: Current Status and the Way Forward at the NIBM.
The last few years have been testing times for Indian banks as they grappled with deteriorating asset quality leading to higher provisioning requirements, falling profitability and weak capital position. However, the banking system is on the cusp of a transformation, aided by recent policy measures to reduce vulnerabilities and improve its financial health. Several initiatives have been undertaken and are also underway to strengthen the regulatory and supervisory frameworks aimed at increasing the resilience of the banking system, according to the governor.
As of March 2019, the capital to risk weighted assets ratio (CRAR) of scheduled commercial banks (SCBs) at 14.2% remains well above the regulatory requirement of 9%. However, if we take into account the capital conservation buffer (CCB), some banks, especially Public-Sector Banks (PSBs), are falling short of the required 10.87%. Overall, the Government's efforts to infuse capital into PSBs has significantly helped them achieve these targets.
For better management of concentration risks and in order to align Indian banks with the international norms, the Reserve Bank proposed guidelines on large exposures which became effective from April 1, 2019. The latest round of reforms published by the Basel committee on Banking Supervision (BCBS) in December 2017 has implementation timelines stretching up to 2022. The Reserve Bank is expected to come up with the draft guidelines by 2020 for consultations.
The deterioration in asset quality of Indian banks, especially that of Public Sector Banks (PSBs), can be traced to the credit boom of 2006-2011 when bank lending grew at an average rate of over 20 per cent. Other factors that contributed to the deterioration in asset quality were adverse macro-financial environment; lax credit appraisal and post-sanction monitoring standards; project delays and cost overruns; and the absence of a strong bankruptcy regime until May 2016. The Reserve Bank set up a Central Repository of Information on Large Credits (CRILC) in 2014 which was followed by an Asset Quality Review (AQR) in 2015.
As a result of these initiatives, the recognition of non-performing assets improved, leading to a sharp rise in the gross NPA ratio from 4.3% at end-March 2015 to 7.5% at end-March 2016. It further reached the peak of 11.5% in March 2018. Recent supervisory data suggests that various efforts made by the Reserve Bank in strengthening its regulatory and supervisory framework and the resolution mechanism instituted through Insolvency and Bankruptcy Code (IBC) are bearing fruit.
This is reflected in significant improvement in asset quality of scheduled commercial banks (SCBs) during 2018-19 as gross NPA ratio declined to 9.3% as on March 2019. At the same time, there has been an improvement in provision coverage ratio (PCR) of SCBs to 60.9% at end-March 2019 from 48.3% at end-March 2018 and 44% at end-March 2015. Due to weak capital position of banks and risk aversion on their part, credit growth remained subdued in recent years. However, with incipient sign of improvement in the health of banks, credit growth is picking up, noted the governor.
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