Stress in banking: Temporary respite–economic time

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The latest Reserve Bank of India (RBI) report on Trend and Progress of Banking is cautiously sanguine on nearterm bank performance, while underlining incipient stress amidst the pandemic. The report lists improved financial performance and enhanced capital adequacy in banks, both in 2019-20 and in first half of this fiscal, but does mention that the recent moratorium on loans and standstill in asset classification have bettered capital ratios, for now. The way forward, surely, is bold, path-breaking fiscal support to boost growth, credit offtake and ability to service loans across the economy.

It is notable, indeed, that gross non-performing assets (GNPA) of scheduled commercial banks (SCBs) have come down from 9.1% by end-March 2019 to 8.2% by endMarch 2020, and have further declined to 7.5% by endSeptember. What is also noteworthy is that capital-torisk-weighted assets ratio (CRAR) of banks has strengthened from 14.3% to 14.7%, and on to 15.8% during the same period, partly aided by recapitalisation of public sector banks and capital raising from the market by both public and private sector banks. Improved profitability and restrictions on dividend payout by banks have help shored up capital ratios, against a backdrop of weak credit offtake and much increased RBI liquidity. Meanwhile, an adverse credit ratio has risen of late. There’s been an increase in the restructured advances ratio to 0.43 at the end of September from 0.36 at the end of March, which points to underlying stress in the banking system.

Banking health depends on overall economic vigour. Proactive fiscal policy is warranted to improve credit offtake and step up the growth momentum, along with an accommodative monetary policy. In tandem, we need improved regulatory oversight, by better leveraging data, machine learning techniques and making use of artificial intelligence to track untoward trends in banking and finance. The recent RBI regulatory mandate for urban cooperative banks and non-banking finance companies makes perfect sense.

This piece appeared as an editorial opinion in the print edition of The Economic Times.


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