RBI Notification

Key highlights of the RBI’s Annual Trends and Progress Report

In its Trends and Progress Report, the RBI observed that the scheduled commercial banks have witnessed an improvement in asset quality, capital buffers and profitability. However the RBI cautioned that banks need to strengthen their corporate governance and risk management practices in order to stay resilient in uncertain economic times such as these. In this article we shall discuss the key highlights of the report.

RBI observations in Annual Trends and Progress Report

As per the report, the total income of the banks remained stable during the year even after a slight decline in the largest component- interest income- in an environment characterised by low credit off-take and interest rates. The fall in the interest rates was cushioned by a significant rise in the income from investments. The income from trading also saw rise as banks witnessed profits on falling G-sec yields.

Their expenses contracted as interest expended on the deposits and borrowing came down due to moderation in interest rates and contraction in total borrowings.

The RBI in its report said that the profitability of banks improved with the decline in the latter exceeding that in the former. In the case of PSBs, profitability or margin improvement was evident.

Asset Quality

As is the case in the last few years, bad loans continued to decline which witnessed gross NPAs of scheduled commercial banks coming down to 7.3% in March 2021 from 8.2% in March 2020 and dropping further to 6.9% in September 2021.

The figure of 6.9% in September is the lowest in five years. Banks’ gross NPA was 7.6% in 2016 and it climbed from 4.6% due to an asset quality review performed by the central bank. Moreover, the gross NPA climbed further to 11.5% in 2018.

The RBI noted that since 2018, write-offs were the predominant recourse to lower GNPA in 2020-21. Although the asset quality improved, the standard restricted advances raised from 0.4% in March 2020 to 0.8% a year later.

Restructured standard advances increased to 1.8% at the end of September 2021 because of the restructuring scheme 2.0 for retail loans and MSMEs that doesn’t entail an asset classification downgrade. The report said that incipient stress is in the form of higher restructured advances. Therefore the banks need to bolster their capital positions in order to absorb potential stress and to augment credit flow when policy support is phased out.

Loan growth recovery

The growth of commercial banks loans that saw deceleration in the last two years showing muted demand conditions and risk aversion showed signs of recovery in the first half of the current financial year.

The RBI added that within population groups, higher credit growth in the rural and semi-urban areas after the Covid-19 outbreak is a bright spot and while public sector banks was the major contributor of rural lending, the share of private banks also saw growth. Adding the credit to GDP ratio increased to a 5 year high.

The RBI further reported that deposit mobilisation in 2021 was the highest in 7 years, due to a healthy growth in current and savings account deposits. However, the first half of the current financial year saw some moderation with normalisation in the economic activities and an increase in inflation.

RBI’s Trends and Progress Report on NBFCs

The RBI stated in its report that Non-Banking Financial Companies are expected to remain buoyant in the future owing to the revival in the economy and rapid pace of vaccinations. The report mentioned that the pandemic had tested the resilience of NBFCs however the sector has emerged more robust with a reasonable balance sheet growth, higher capital, increased credit intermediation, lower delinquency ratio and enlarged liquidity cushions.

The RBI observed that the financial system is maturing from a bank dominated space to a hybrid system and the non-bank intermediaries are gaining prominence. It further added that the developments in this sector in 2020-21 are a harbinger of brighter prospects in the future. It said many policies in the aftermath of pandemic gave NBFCs adequate time and helped in weathering the shock and leverage on its grass root level reach to channel credit to productive sectors and revive growth.

The report said that the RBI had introduced scale based regulation to enhance regulatory oversight and to further strengthen the supervisory tools applicable to NBFCs, RBI had issued a prompt corrective action framework for NBFCs.

The RBI^[1] noted that many NBFCs used the pandemic to reinvent their business models, and in view of that many have collaborated with Fintech firms to leverage technological innovations. However the report warned NBFCs on cyber fraud and said that they need to be better equipped to tackle cyber fraud.

Conclusion

The Reserve Bank of India had released the trends and progress report of Banking in India 2020-21, on 28^th December, a statutory publication in compliance with Section 36 (2) of the Banking Regulation Act, 1949. It provides the performance of the banking sector, including co-operative banks, and non-banking financial institutions (NBFCs) during 2020-21 and 2021-22 so far. The Report also provides some perspectives on the changing outlook for financial sector of India. We have attached the official notification of the Reserve Bank with this article for your reference.

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