The Reserve Bank of India (RBI) has recently advised banks to stay vigilant regarding several areas, including deposit growth lagging behind credit growth, asset quality and the integration of new-age technology solutions. Many factors, both domestic and international, contribute to this advice.
The Context Behind RBI’s Advisory
The RBI described the current domestic macroeconomic outlook as resilient yet sensitive to significant global shifts. Three primary global headwinds are influencing this fragile situation: Russia’s actions in Ukraine affecting energy supplies and prices, particularly in Europe; China’s economic slowdown due to repeated lockdowns from its zero-Covid policy; and increased cost of living from resulting inflationary pressures. These situations have led to tightening monetary policies across the world, mainly in advanced economies, sparking worries about financial stability risks in emerging and developing nations.
Deposit and Credit Growth Dynamics
A bank’s ability to disburse credit is reliant on its inherent reserves. In an active economy, the demand for credit also increases. Presently, according to the RBI, the overall domestic credit demand portrays an “uneven profile.” While urban demand remains robust, rural demand, which had been subdued, has started showing signs of strength. Commercial bank credit growth, led by services, personal loans, agriculture, and industry, reflects a growing preference for bank credit for meeting working capital requirements.
The most recent data from RBI shows that aggregate bank deposits have grown by 8.2% compared to 11.4% on a YoY basis while credit off-take has jumped by 17%, compared to an increase of 7.1% on a YoY basis. CRISIL suggests that it’s not a matter of deposit growth declining significantly, but rather, credit growth increasing in recent quarters. With economic activity returning to normal post-pandemic, credit growth – especially in the past three quarters – has seen an upswing.
A Look at Banks’ Asset Quality
Banks’ Gross Non-Performing assets (GNPAs) have seen a steady decline with net NPAs reducing to 1% of total assets. Liquidity coverage is strong and profitability has been fortified. But concerns have arisen among market participants regarding corporates due to the macroeconomic circumstances.
The improvement in asset quality comes from the de-leveraging that has occurred among corporations in India over the years – most have reduced their debt levels and improved their credit profiles. Corporate NPAs are expected to decrease in the upcoming fiscal years owing to the establishment of the National Asset Reconstruction Company Ltd, set to take over some legacy corporate loan NPAs from banks.
Previous UPSC Civil Services Examination Questions
In a previous UPSC Civil Services Examination, the following statements were discussed: The Governor of the RBI is appointed by the Central Government; certain provisions in the Indian Constitution give the Central Government the right to issue instructions to the RBI for public interest; the Governor of the RBI derives his power from the RBI Act. The candidates were asked to identify the correct statements; the answer was Statements 1 and 3.
