Banking sector’s health hinges on macroeconomic turnaround: RBI report

There has been an improvement in the asset quality of banks after a gap of seven years, the Reserve Bank of India (RBI) said in a report.

The central bank also highlighted that the banking sector's health hinges on turnaround in growth.

"After seven years of deterioration, the overhang of stressed assets declined, and fresh slippages were arrested," RBI said in the Trends and Progress report released on December 24.

As on September 30, 2019, the gross non-performing assets (NPA) ratio stood at 9.1 percent, as compared to 11.2 percent a year ago. The net NPA ratio also improved to 3.7 percent, from 6 percent in the same period.

"Going forward, issues such as resolution of stressed assets, weak corporate governance, and frauds need to be addressed to reaffirm a robust financial sector that minimises systemic risks," it added.

RBI said that it is monitoring the health of banks that are currently under the Prompt Corrective Action (PCA) framework.

In light of slowdown in corporate credit demand, banks have shifted to retail lending, RBI said. However, while growth slowdown may affect the demand for retail loans, it may also hamper their quality, the central bank said.

RBI also pointed there is a need to address weak governance and frauds in the system. The central bank added that fault lines are evident in the corporate governance of private banks.

The challenges faced by the Non-banking finance companies (NBFCs) was due to inherent fragility rather than liquidity crunch, RBI said. While the lending by NBFCs moderated over the past year, their loan-loss provisioning remained at comfortable levels, RBI said.

In terms of the health of cooperative banks, RBI said that the dual control shared with state governments affected timely action against weak banks.

Also, there is a need of an "independent and efficacious audit system to ensure sound health of co-operative banks," the central bank said.

Overall, the vital financial indicators of the banking sector are gradually improving, RBI said, adding that the elevated stress in NBFCs and co-operative segments were not large enough to have systemic implications.