Banks have become cleaner, stronger

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Although not easy, one of the successes of the NDA’s 10-year rule has been the reforms in the banking sector. Measures such as cleaning up bank balance-sheets with Asset Quality Review (AQR), implementation of the IBC Code, increased financial inclusion and bank consolidation have ensured that the banking sector is in a better position than it was 10 years ago.

Although there are a few issues such as lopsided credit growth of retail loans and governance problems in some banks, this is not uncommon.


In a candid chat with BusinesslineArun Jaitley, who was the finance minister in NDA I, said that the question he was frequently asked by global investors was how to deal with banks.

“It is a legitimate concern. Growth must be supported by bank lending and we cannot allow ourselves to be bogged down by the problem of non-performing assets. Thus, the consolidation and clean-up exercise of the banking system began.

The healthy glow of banks now is largely due to the AQR exercise launched in 2015. AQR was a balance-sheet clean up exercise, which led to the reclassification of restructured advances as non-performing assets/NPAs.

This exercise required a large loan loss provision and as a result, the banking system’s NPAs rose to 11.6 per cent by March 2018. Public sector banks (PSBs) suffered as they were saddled with high non-performing assets; Their NPAs have increased to 15.6 percent while private sector banks’ NPAs have increased to 4 percent. While many PSBs slipped into the red, private sector banks (PVBs) were able to hold up relatively well.

Implementation of IBC

Cut to FY24. With well-provisioned balance-sheets, loan recovery outpacing impairments, strong capital buffers and strong, most banks are now in the rosy of health, with bad loans at multi-year lows (GNPA 3.2 per cent by September-end 2023). Loan growth.

The reduction in bad loans in the banking system can also be attributed to the implementation of the Insolvency and Bankruptcy Code (IBC) and write-offs.

In a speech in January this year, RBI Governor Shaktikanta Das noted that creditors had received ₹3.16-lakh crore of allowable claims of ₹9.92-lakh crore by September 2023, which works out at a recovery rate of 32 per cent.

“It needs to be emphasized here that these assets must have already undergone substantial value destruction before their entry under the IBC. ….When assessed from the prism of liquidation value and fair value, the recovery rates of 169 per cent and 86 per cent respectively look very encouraging,” he said.

capital infusion

The government, on its part, ensured that its owned banks did not run out of capital. It injected around ₹3.26-lakh crore into PSBs between FY17 and FY22.

Capital infusion was the silver bullet that not only helped PSBs to provide bad loans, but also to maintain capital above the minimum regulatory threshold so that they could increase lending. PSBs have been sailing under their own steam (raising capital from the market) since FY23.

The NDA government gave a big push for consolidation among PSBs to create strong and competitive banks. This was initiated in 2017 with the merger of five State Bank associate banks and Bharatiya Mahila Bank with State Bank of India.

This was followed by the merger of Vijaya Bank and Dena Bank with Bank of Baroda in 2019 and the mega consolidation of 10 PSBs in 2020.

Two banks in the PVB space — Yes Bank and Laxmi Vilas Bank (LVB) — ran into trouble. As per the government’s proposed restructuring plan, Yes Bank was rescued by the State Bank of India, other banks and financial institutions with capital of ₹10,000 crore. Lakshmi Vilas Bank was merged with DBS Bank India Limited.

It was the merger with HDFC Bank in July 2023 that grabbed the attention of all stakeholders. In the co-operative banking space, the Punjab and Maharashtra Co-operative Bank, which suffered a massive fraud in 2019, was resolved by merging. with Unity Small Finance Bank in January 2022.


While the demonetisation (withdrawal) of ₹500 and ₹1,000 notes (from November 10, 2016 to December 30, 2016) proved operationally intensive for banks, with branches operating well beyond normal working hours and even on holidays, it But resulted. Significant growth in deposits, surge in Pradhan Mantri Jan Dhan Yojana account opening, boom in digital transactions etc.

Following AQR, banks’ changed strategy focused more on growing RAM (retail, agriculture and MSME) loans as compared to corporate loans.

On average, RAM loans now account for around 60 per cent of banks’ overall loan portfolio, up from around 40 per cent a decade ago, with the balance accounted for by corporate/wholesale loans.

Banks have stepped on the gas on retail loans since the pandemic. Between September 2021 and September 2023, banks’ retail loans (housing loans, vehicle loans, loans against property, education loans, loans against FDs, loans against shares, personal loans, credit cards, consumer durables and other retail loans) increased by a compound. . A compound annual growth rate (CAGR) of 25.5 percent, surpassing the headline credit growth of 18.6 percent as per RBI data. However, lenders in retail lending are upbeat even as loans to industry have slowed.

While financial inclusion has improved over the past three years with the introduction of fintech-based lending, it has also resulted in more competition among banks and some sharp practices that need to be checked.

An incomplete agenda

Karthik Srinivasan, Senior Vice-President, Group Head – Financial Sector Ratings, ICRA, observed that after the last 10 years of events, with an estimated Tier 1 of 14.5 per cent, solvency of 6 per cent and return on assets of 1.2 per cent. By FY24, the banking system is well-prepared to navigate the future, though adherence to the letter and spirit of the rules is essential.

An unfinished agenda would be the banking sector’s transition to the Expected Credit Loss (ECL) framework and closing of the stake sale in IDBI Bank. A few years ago, Finance Minister Nirmala Sitharaman said that India needed at least four or five banks of the size of State Bank of India to meet the growing needs of the economy. It remains to be seen whether the government will encourage another round of consolidation among PSBs to achieve this goal.

#Banks #cleaner #stronger

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