Capital shield for Indian banks even in times of stress: RBI

The management of the Indian banking system is one of the bright spots that Reserve Bank of India (RBI) and the financial leaders of the country have done with finesse over the decades despite global turmoil and the best tidings that the central bank could have shared at the end of 2023 is exactly what it has said in its December edition of the Financial Stability Report (FSR) – that the banking industry has reduced its net NPA 0.8% and a capital adequacy ratio of 16.6% effective at September-end. The net NPA figure is a record low, the Business Standard has reported.

Gross NPA is expected to improve to 3.1% by September 2024, the report projected. It is 3.2% now.

The underlying message is that the scheduled commercial banks are comfortably capitalised and can sail through even macroeconomic shocks without fresh capital infusion by respective stakeholders.

It has been stated that the capital position will be at 12.2% even under severe stress which is considerably above the minimum capital requirements.

“No SCB would breach the minimum capital requirement of 9 per cent in the next one year,” the report stated.

Incidentally, the capital adequacy ratio of a bank is the ratio of the capital of the bank in question to its current liability and risk-weighted asset and is one of the fundamental health parameters of any bank.

The report has also stated that credit card dues – of which the RBI has been cautioning banks for several months – are a cause of worry. The agriculture sector accounts for a high 7% bad loan. However, credit quality in the growing retail loan segment has improved.

The financial stability report also found that the stress in the NBFC domain is higher under a high-risk stress scenario relative to the position in March 2023.

The growth in personal loans of the NBFCs at a CAGR of 33% over the past four years has been a cause of worry. It is more than double of the 15% growth recorded in the overall credit figures. The report pointed it out in the following words: “Going forward, the recent increase in risk weights of select retail loan categories may have implications for NBFC credit growth at the overall, sectoral, and sub-sectoral levels.”

The RBI report also warned about contagion risks. It said close monitoring of the situation is required since increased inter-bank exposure is a definite phenomenon.

The total outstanding bilateral exposures among institutions/companies in the financial ecosystem are rising and the incidences of interbank exposures in the total assets climbed to a level that is a three-year-high in September 2023.

The report did mention that it raised contagion risk and consequent additional solvency losses to the banking system but added that the rise was only marginally and it was certainly not to an extent to pave the way for the failure of any bank.

The report also said that prudent loan exposure management, creation of financial buffers and constant monitoring are important preconditions to the healthy functioning of the bank, especially in a time of heightened financial uncertainly in large parts of the wor