Poised for lift-off: The India's banking system is in a sweet spot

The banking system is in a sweet spot. Gross non-performing assets (GNPAs) continue to decline – they fell to a decadal low of 3.9 per cent at the end of March 2023 and further to 3.2 per cent at end-September 2023, building on the trend that started in FY19. Mint Road’s Financial Stability Report of December 2023 has it that the GNPA ratio may improve to 3.1 per cent by September 2024 from the current level of 3.2 per cent. What is impressive is this matter of detail: In the case of large borrowers, the proportion of standard assets to total funded amount outstanding has been improving over the past three years; and within this, the share of the top 100 borrowers, which was rising for two years until March 2023, was lower in FY24. As of end-September 2023, none of the top 100 borrower accounts remain in the NPA category. The big boys in India Inc, who have kept their powder dry, may be back.

Retail banking and the services sector were the primary drivers of credit growth. The Reserve Bank of India (RBI) has of late voiced its concerns over the growth in the unsecured retail segment, which has outpaced secular credit growth. While there’s nothing yet to suggest that asset quality in unsecured credit is a cause for worry, the move to hike risk weights is a pre-emptive strike to arrest slippages.

On the regulatory front, a few non-banking financial companies (NBFCs) may find the going tough. Given the inter-connectedness between banks and NBFCs, the latter will have to broaden their funding avenues and slash reliance on bank credit. Mint Road can also be expected to continue on its journey to hike the governance premium across its regulated entities.

The first advance estimate has placed the real GDP growth at 7.3 per cent for FY24, marking the third successive year of growth above 7 per cent. The RBI’s January 2024 round of its bi-monthly consumer confidence survey (CCS) shows the current situation index (CSI) improved further to 95.1 in January 2024 from 92.2 in November 2023. Households expect improvements in general economic and employment conditions to continue over the next one year. Even though confidence in future income conditions is a shade lower vis-à-vis the previous survey round, following four successive rounds of improvements.

Two years ago, RBI governor Shaktikanta Das referred to “Knightian uncertainty” (named after the economist, Frank Knight). It's the lack of any quantifiable knowledge about some possible occurrence, as opposed to quantifiable risk. While this is a concern for all times, current banking indicators taken together appear to suggest that it’s only a matter of time before the animal spirits are back.