RBI Shocker: Banks & NBFCs in Peak Health! Economic Growth Gears Up!

The Reserve Bank of India (RBI) has announced that the financial health of both banks and Non-Banking Finance Companies (NBFCs) in India remains robust, significantly boosting the flow of resources to the commercial sector.

RBI's Assessment of Financial Sector Strength

• Reserve Bank of India Governor Sanjay Malhotra stated that the system-level financial parameters for banks and NBFCs are strong. He highlighted that key indicators, including capital adequacy and asset quality, are in good shape across the sector.
• This solid financial footing is enabling a greater supply of funds to businesses and the wider commercial economy.

Key Financial Health Indicators

• Banks demonstrated strong performance, with the Capital to Risk Weighted Assets Ratio (CRAR) at 17.24% in September, well above the regulatory minimum of 11.5%.
• Asset quality improved, as evidenced by the gross Non-Performing Assets (NPA) ratio falling to 2.05% by the end of September, a decrease from 2.54% a year prior.
• The collective net NPA ratio also saw an improvement, standing at 0.48% compared to 0.57% previously.
• Liquidity buffers were substantial, with the liquidity coverage ratio (LCR) recorded at 131.69%.
• The sector reported an annualised return on assets (RoA) of 1.32% and a return on equity (RoE) of 13.06%.

Resource Flow and Credit Growth

• The overall flow of resources to the commercial sector has strengthened considerably, partly due to increased activity from non-bank financial intermediaries.
• Year-to-date, the total resource flow to the commercial sector surpassed Rs 20 lakh crore, a notable increase from Rs 16.5 lakh crore in the corresponding period of the previous financial year.
• Outstanding credit from both banking and non-banking sources collectively grew by 13%.

Bank Credit Dynamics

• Bank credit expanded by 11.3% year-on-year up to October.
• This growth was sustained by robust lending to the retail and service sector segments.
• Industrial credit growth also firmed up, supported by strong credit flow to micro, small, and medium enterprises (MSMEs).
• Credit growth also improved for large industries.

NBFC Sector Performance

• The NBFC sector maintained strong capitalisation, with its CRAR at 25.11%, significantly higher than the minimum regulatory requirement of 15%.
• Asset quality in the NBFC sector also improved, with gross NPA ratio decreasing to 2.21% from 2.57% and net NPA ratio to 0.99% from 1.04%.
• However, the return on assets for NBFCs saw a marginal dip, falling to 2.83% from 3.25%.

Impact

• The positive financial standing of banks and NBFCs signals a stable financial ecosystem, crucial for sustained economic growth.
• Increased availability of resources to the commercial sector can stimulate investment, facilitate business expansion, and contribute to job creation.
• This robust assessment by the RBI is likely to enhance investor confidence in the financial sector and the broader Indian economy.
• Impact Rating: 8

Difficult Terms Explained

• Capital Adequacy Ratio (CAR) / Capital to Risk Weighted Assets Ratio (CRAR): A regulatory measure that ensures banks have sufficient capital to absorb potential losses arising from their risk-weighted assets. A higher ratio indicates greater financial strength.
• Asset Quality: Refers to the risk profile of a lender's assets, primarily its loan portfolio. Good asset quality implies a low risk of loan defaults and a high probability of repayment.
• Non-Performing Assets (NPA): A loan or advance for which the principal or interest payment remained overdue for a specified period (typically 90 days).
• Liquidity Coverage Ratio (LCR): A liquidity risk management measure that requires banks to hold a sufficient stock of unencumbered high-quality liquid assets (HQLA) to cover their net cash outflows over a 30-day stress period.
• Non-Banking Finance Company (NBFC): A financial institution that offers many services similar to banks but does not hold a banking license. They are involved in lending, leasing, hire-purchase, and investment.
• Return on Assets (RoA): A financial ratio that indicates how profitable a company is in relation to its total assets. It measures management's efficiency in using assets to generate earnings.
• Return on Equity (RoE): A profitability ratio that measures how effectively a company uses shareholder investments to generate profits.