RBI’s FSR projects green shoots on the domestic banking front in a difficult global macro environment

Jaya Vaidhyanathan, CEO, BCT Digital

The latest FSR released by the Reserve Bank of India (RBI) brings out today’s true situation – a difficult global macro environment and visible green shoots on the domestic banking front. In such a scenario, the job of the central bank and the bankers, which is to balance the aggressive policies required for growth while exerting control to manage and mitigate heightening risks, is challenging.

The two sides of the coin are elaborated here

Macroeconomic risks are indeed high, with geopolitical tensions, supply chain disruptions and high inflation causing problems for the public and the government. The reaction to these challenges by authorities have had far-reaching and often adverse impact. Lockdowns, sanctions and interest rate hikes, for example, have been doing a lot of harm besides their intended consequences. Rupee depreciation and commodity inflation are bloating our import bill, FIIs are pulling money out of Indian debt and equity markets, and our hitherto strong reserves are seeing a beating.

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However, the banking system, which fuels the economy, has been projecting a positive picture, when viewed as a trend rather than point-in-time. Here are a few figures supporting this:

• Bank credit grew 13% YoY as of June 2022 – a level last seen 13 quarters ago – highlighting the fact that businesses have started expanding and individuals have resumed purchases

• Deposit growth slowed to 9% by June 2022 from almost 12% in March 2021 (when deposit growth far outstripped credit growth, putting pressure on banking margins)

• In terms of the health of the asset book, Indian banks have a vastly improved picture today than in the last 6 years. With Gross NPAs at 5.9% of assets at a system level, banks are healthier than in March 2021 (7.4%) and certainly much better than pre-covid levels. It can be reasonably assumed that the worst is behind us, with the balance sheets cleaned up and even existing NPAs provided to a large extent (Provision Coverage Ratio of ~71% in Mar’22). Fresh slippages to NPAs are also reduced, with the ratio at 1%.

• This, coupled with the fact that banks have raised capital and improved their capital ratios (SCBs’ CRAR at 16.7%, 15.8% for urban co-operative banks and 26.9% for NBFCs in March 2022), means that with a healthy book, financial institutions are now ready to take full advantage of the credit growth cycle when it picks up, as they are well capitalised to absorb stress scenarios in future

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The above facts clearly point out that the Indian banking system is well poised for growth, provided the risks are managed well. This is quite unlike the west, which is convinced that a recession is upon them. These risks include traditionally envisaged risks, such as currency depreciation, capital outflows, and inflation, as well as newer risks, such as the cyber risks brought on by increasing digitisation, and cryptocurrencies, which are becoming increasingly difficult to manage. While central bankers have been cautioning the public to stay away from cryptocurrencies for quite some time now, the sheer magnitude of the fall in the crypto market in the last six months must have instilled some awareness among the public of the risks of investing in them.

Views expressed in this article are the personal opinion of Jaya Vaidhyanathan, CEO, BCT Digital.

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