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"India's banking sector continues to astonish. Its performance in 2023-24, revealed in the Financial Stability Report (FSR) of June 2024, is as much of a pleasant surprise as its turnaround in the preceding years.
The sector entered the first year of the Covid-19 pandemic, 2020-21, with a non-performing asset (NPA) level of 8.5 per cent of advances. Analysts warned that the improvement seen in the previous two years was in jeopardy. The chances were that NPAs would shoot up instead of declining. Vast amounts would again be needed to recapitalise public sector banks (PSBs).
Later, as the Reserve Bank of India (RBI) announced various restructuring schemes, we were warned of the perils of "kicking the can down the road". If you don't recognise NPAs now, be prepared for higher NPAs to show up later, analysts said. It was better, they argued, to "bite the bullet" now.
They were proved wrong. Outof-the-box thinking enabled the RBI to nudge the banking sector back to normalcy in the post-pandemic years despite the Ukraine shock and the shocks emanating from banking instability in the US and Europe. By 2022-23, NPAS had fallen to 3.9 per cent.
Fair enough, the analysts said. However, sustaining the secular improvement in financial indicators of the previous years would be difficult in 2023-24. Banks would face a liquidity crunch, with deposits failing to keep pace with growth in loans. The net interest margin would be squeezed and asset quality would suffer from the rapid build-up of loans. Returns were bound to fall.
This story is from the July 12, 2024 edition of Business Standard.
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This story is from the July 12, 2024 edition of Business Standard.
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