RBI report sees easing of banking sector's NPA woes

The financial performance of banks in India, especially public sector banks (PSBs), was weighed down by high provisioning on account of non-performing assets.

As a result, PSBs reported net losses for the second year in a row. Private sector banks, however, posted a muted increase in profits during the year, says an RBI report.

However, during the first half of 2017-18, a modest pick-up in bank credit has occurred alongside the improvement in transmission that was observed post-demonetisation. Stressed assets have stabilised at an elevated level, while profitability as reflected in return on assets also remained stable, says RBI's Report on Trend and Progress of Banking in India 2016-17.

The consolidated balance sheet of non-banking financial companies (NBFCs) expanded during 2016-17 on the back of healthy growth of loans and advances.

However, their profitability declined along with deterioration in asset quality. The consolidated balance sheet of all-India financial institutions (AIFIs) increased in 2016-17 due to loans and advances, and their operating profit ratio improved with a moderation in the growth of interest outgo.

Notwithstanding these challenges, the Reserve Bank has fine-tuned its regulatory and supervisory policies to ensure a sound, resilient and inclusive banking system. The provisions of the revised prompt corrective action (PCA) framework were implemented with effect from 1 April 2017.

A watershed development in India in 2016-17 has been the enactment of the Insolvency and Bankruptcy Code (IBC) in May 2016. Subsequent to the enactment of the IBC, the Banking Regulation Act, 1949 was amended to empower the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution in respect of a default under the provisions of the IBC.

Moreover, the government also announced a large-scale bank recapitalisation plan in October 2017 to reinvigorate PSBs struggling with high levels of stressed advances.

Several policy measures were initiated in the payment and settlement systems to ensure robust and customer friendly payment systems. Master directions on Pre-paid Payment Instruments (PPIs) were issued.

The operationalisation of small finance banks and payments banks is expected to provide further impetus to the financial inclusion agenda.

Co-operative institutions, which have often been plagued by fragile financial health, portrayed a sanguine picture. Following on-going consolidation efforts, urban co-operative banks (UCBs) exhibited expansion in balance sheet size and recorded improved profitability in 2016-17.

There was a turnaround in the performance of the apex-level long-term rural credit co-operatives, while the short-term rural credit co-operatives comprising state co-operative banks (StCBs) and district central co-operative banks (DCCBs) have exhibited improved performance over time. Primary agricultural credit societies (PACS), the grass-root level tier of the short-term co-operative credit structure continued to incur losses.

The report flags the main challenges that will likely shape the outlook for the financial sector in India, which include:

• Resolution of stressed assets under ongoing refinement of the Insolvency and Bankruptcy Code, 2016;
• Strengthening of bank balance sheets for reinvigorating credit growth;
• Developing robust accounting standards for banks with the aim of closing gaps in accounting practices;
• Promoting differentiated banking and exploring scope for its expansion to wholesale and long-term financing;
• Promoting digitisation and managing technology-enabled financial services; and
• Managing cyber-security risks with the aim of strengthening resilience of the financial system.