Brace for change: A key development on the anvil is the green taxonomy

Banks’ loan-book quality remains robust. According to the Reserve Bank of India's (RBI's) Financial Stability Report (December, 2024), buoyed by falling slippages, higher writeoffs, and steady credit demand, the gross non-performing asset (NPA) ratio of scheduled commercial banks fell to 2.6 per cent in September 2024, the lowest in over a decade. The net NPA ratio also declined to 0.6 per cent, aided by strong provisioning. Additionally, the special mention accounts (SMA-2) ratio, which is a lead indicator of asset quality, is also displaying low potential impairment.

 

The retail portfolio of banks, however, is telling a different story. While the gross NPA ratio stood ­­­­at 1.2 per cent in September 2024, the same for unsecured lending was marginally higher at 1.7 per cent. There has been a sharp rise in writeoffs, especially among private banks. This could be partly masking the worsening asset quality in this segment and dilution in underwriting standards. Fresh accretion of NPAs in retail portfolios was also dominated by slippages in the unsecured loan book — 51.9 per cent from unsecured loans as of September end last year.

 

This is, in part, linked to the growth-side story. The gross domestic product (GDP) growth estimates for FY25 have been maintained at 6.4 per cent, far lower than the 8.2 per cent GDP growth witnessed in FY24. A rate cut in the February Monetary Policy Committee meeting has been pencilled in, but what one may see is a further cut in the cash reserve ratio, not a repo rate cut. The inauguration of Donald Trump as the 47th President of the United States will bring other variables into play, notably tariffs. This has implications for the rupee. The upcoming Union Budget will give indications on how New Delhi is reading the plot ahead.

 

Related to the above — though it may not be evident in the first instance — is that the banking regulator may step up its consultative process. There is a feeling that while the RBI is right to stress its governance initiatives, it has also gone overboard. How its ‘Connect 2 Regulate – Open Regulation Initiative’, launched as part of its ongoing RBI@90 commemorative events, pans out is something to watch out for. This initiative is to enable stakeholders to submit their ideas on regulatory topics. A dedicated section on the RBI’s website is to facilitate this engagement in order to ensure the regulatory interface is a two-way process.

 

A key development on the anvil is the green taxonomy. The Report on Trend and Progress of Banking in India (FY24) provides insights into what is in the offing. The central bank is in the process of finalising and issuing a guidance note on scenario analysis and stress testing of climate-related risks. This is for modelling techniques, scenario considerations, and methodologies for carrying out stress-testing exercises. The RBI’s aspirational goals for RBI@100 include establishing a robust regulatory and supervisory framework to effectively manage challenges arising from climate change, enhancing the resilience of payment systems against climate risks, and collaborating with the government to finalise a comprehensive taxonomy.