India, home to the second largest emerging green bond market in the world after its neighbor China, has seen a complex series of financial shifts, boons, and challenges in recent years. Monetary policy remained accommodative in 2019-20, indicating the Central Bank’s attempts to expand overall money supply to stimulate economic growth when GDP growth slows down. However, the financial flows to the economy remained restricted as credit growth declined for both banking institutions and Non-Banking Financial Corporations (NBFCs).
A Glance at Monetary Policy and Banking Performance
One of the defining features of the financial year 2019-20 was the continuance of an accommodative monetary policy. This approach is generally applied when a central bank strives to expand the overall money supply to invigorate the economy during periods of slowing growth, as indicated by GDP measures. In India, this policy has been a key factor influencing the performance of banks and NBFCs.
The Gross Non Performing Advances Ratio, a critical measure of financial health for Scheduled Commercial Banks (SCBs), remained unchanged at 9.3% between March and September 2019. For NBFCs, this ratio saw a minor increase from 6.1% in March to 6.3% in September 2019. While these figures hint at stability, they also indicate relatively constrained financial flows in the economy as credit growth experienced decline for both these types of institutions.
Capital-to-Risk and Fiscal Consolidation
A notable bright spot in India’s financial landscape between March and September 2019 was the increase in the Capital to Risk-weighted Asset Ratio of SCBs from 14.3% to 15.1%. This upward trend shows a positive development in managing potential risks associated with lending.
Furthermore, the General Government, which includes both Centre and States, demonstrated progress on the path of fiscal consolidation. Fiscal consolidation refers to a policy aimed at reducing government deficits and the accumulation of debt.
| Key Financial Ratios | March 2019 | September 2019 |
|---|---|---|
| Gross Non Performing Advances Ratio (SCBs) | 9.3% | 9.3% |
| Gross Non Performing Advances Ratio (NBFCs) | 6.1% | 6.3% |
| Capital to Risk-weighted Asset Ratio (SCBs) | 14.3% | 15.1% |
Bank Nationalization, Inefficiencies and Potential Solutions
Despite the prevalence of Scheduled Commercial Banks and NBFCs in India, the country has only one bank that ranks in the global top 100. The 2019 Economic Survey marked the golden jubilee year of bank nationalization but simultaneously highlighted the inefficiencies of Public Sector Banks (PSBs), which lagged behind their peer groups on every performance parameter.
The survey suggested several potential solutions, including introducing an Employee Stock Ownership Plan for PSBs’ employees and creating a GSTN type entity to aggregate information from all PSBs. This entity could leverage technologies like big data, artificial intelligence, and machine learning to enhance credit decision making. Another proposal was the implementation of a ‘health score’ index for NBFCs, which could provide early warnings of possible liquidity risks.
