India’s financial system remains stable bolstered by healthy balance sheets of banks, NBFCs: RBI’s FSR

The asset quality of Scheduled Commercial Banks (SCBs) improved further with their Gross Non Performing Asset (GNPA) ratio declining to a 12- year low of 2.6% in September 2024, the Reserve Bank of India (RBI) said in the December 2024 issue of the Financial Stability Report (FSR) which was released on Monday.

As per this half yearly publication, the Net NPA (NNPA) ratio of the SCBs remained at around 0.6%.

“The half-yearly slippage ratio, measuring new accretions to NPAs as a share of standard advances at the beginning of the half-year, increased marginally to 0.7%. The provisioning coverage ratio (PCR) of SCBs improved further to 77% in September 2024, largely due to proactive provisioning by PSBs,” the RBI said in the report.

“The write-off to GNPA ratio for Foreign Banks increased in September 2024 while that of Public Sector Banks (PSBs) and Private Sector Banks (PVBs) declined marginally. Disaggregation of NPA movements reveals that write-offs remain a significant component of NPA reduction,” the banking regulator emphasized.

It said while stronger capital buffers boosted the soundness dimension of banks, declining NPAs and improved provisioning bolstered asset quality.

“Despite improvement in return on assets (RoA) and earnings before provisions and taxes, the profitability dimension remained unchanged, weighed down by a sequential decline in the net interest margin (NIM) abetted by shift of deposits to higher interest rate buckets,” it said.

According to the report the resilience of the domestic banking system has been bolstered by robust capital buffers, strong earnings and sustained improvement in asset quality.

Stating that the growth in bank loans and deposits moderated during H1:2024-25 and the wedge between them narrowed further, the RBI said banks’ deposit profile has been changing, with a decline in the share of low-cost CASA deposits in favour of term deposits, especially for higher interest rate buckets.

As per the report despite global uncertainties the Indian economy and the domestic financial system are underpinned by strong macroeconomic fundamentals, healthy balance sheets of banks and non-banks.

Macro stress tests demonstrate that most SCBs have adequate capital buffers relative to the regulatory minimum even under adverse stress scenarios. Stress tests also validate the resilience of mutual funds and clearing corporations.

Non-banking financial companies (NBFCs) remain healthy with sizable capital buffers, robust interest margins and earnings and improving asset quality. And consolidated solvency ratio of the insurance sector also remains above the minimum threshold limit, the RBI said in the report,

In the latest round of the systemic risk survey (SRS) carried out in November 2024, majority of respondents expressed confidence in domestic financial system stability and assessed geopolitical conflicts, evolution of global growth and inflation, and capital outflows/ rupee depreciation as major near-term risks.

Governor Sanjay Malhotra in the foreword said, “Notwithstanding the uncertainties shrouding the global macrofinancial ethos as it unfolds, prospects for the Indian economy are expected to improve after the slowdown in the pace of economic activity in the first half of 2024-25.”

“Consumer and business confidence for the year ahead remain high and the investment scenario is brighter as corporations step into 2025 with robust balance sheets and high profitability. As we strive to preserve financial stability to support a higher growth path for the Indian economy, our focus remains steadfast on maintaining stability of financial institutions and, more broadly, systemic stability,” he said.

As per the report the overall performance of listed private non-financial companies (NFCs) has remained steady this year so far. Their sales growth (y-o-y) remained stable at 6.2% in H1:2024-25 same as in H2:2023-24.

according to the report at 42.9% of GDP (at current market prices) in June 2024, India’s household debt is relatively low compared to other Emerging Market Economies, however, it has increased over the past three years.

“Even as household debt is on a rising trend, the increase is driven by a growing number of borrowers rather than an increase in average indebtedness. Borrowing by individuals in the household sector constituted around 91% of the stock of household financial liabilities as at end- March 2024,” the RBI said in the report.

“Disaggregated analysis of the nature of individuals’ borrowings shows that loans are primarily used for consumption (personal loans, credit cards, consumer durable loans and other personal loans), asset creation (mortgage loans and vehicle loans and two-wheeler loans) and for productive purposes (agriculture loans, business loans and education loans). Notably, close to two-thirds of the portfolio is of prime and above credit quality,” it said.

“The capita debt of individual borrowers has increased sharply for super-prime borrowers in the recent period, while it has remained stable for other risk tiers. From a debt-servicing capacity perspective, the rise in per capita debt only among highly rated borrowers and use of debt for asset creation are credit positive and financial stability enhancing,” it added.

As per the report despite the recent correction in the stock markets, equity valuations remain elevated across metrics, such as trailing and forward price-to-earnings (P/E) ratios, market capitalisation-to-GDP and earnings yield.

Such has become the case that midcap smallcap and microcap stocks in the stock market yielded returns of over 30% as the broader Nifty 50 Index posted annualised returns of 17%.

Summing up the RBI in the report said “In this uncertain global macroeconomic and financial environment, the Indian economy is exhibiting resilience and stability. Real gross domestic product (GDP) is projected to grow at 6.6% in 2024-25 aided by revival in rural consumption, pickup in government consumption and investment and strong services exports.”

The underlying growth momentum remains strong and stable financial system, bolstered by healthy balance sheets and profitability of banks and non-banks and reasonable expansion in credit is providing support to businesses and households, it added.