Financial Turmoil Continues at The Global Level, but India Cuts NPA Ratio to a Decadal Low

The Indian economy continues to show solid growth momentum, underpinned by strong macroeconomic fundamentals, despite global uncertainty and a deteriorating outlook for global economic development. Beyond the 7.2% growth last year, the Reserve Bank of India forecasts real GDP growth at 6.5% for 2023–2024. The World Bank predicts that India’s GDP growth will be 6.3% in 2023-24, compared to the IMF’s projection of 5.9%. India’s development prospects were even more upbeat in the UN study “The World Economic Situation and Prospects as of Mid-2023¹,” released in May. The analysis stated that higher interest rates and lower foreign demand will likely prevent India’s GDP from growing by 6.7% in the calendar year 2024.

There are a number of variables influencing India’s greater growth rate, but its stable and expanding financial sector has had the greatest impact. India’s strong financial industry has contributed to the country’s resilient growth. Despite the financial instability that the advanced economies went through last year, the banking industry performed very well. Due to the vulnerability of some banking systems, geopolitical unrest, and globally moderate but increasing inflation, there is still a high level of uncertainty surrounding the international economy. The US, the largest economy in the world, had some of its major banks fail only a few months ago. After a bank run, Silicon Valley Bank (SVB) failed on March 10, 2023, making it the third-largest bank failure in American history and the biggest since 2008. Along with Silvergate Bank and Signature Bank, it was one of the three US banks that failed in March 2023. Following several years of scandals, the Credit Suisse Bank in Switzerland also collapsed in March 2023. Amidst all this, as the global financial turmoil continues, India is an exception.

Intriguingly, Indian banks were hard at work lowering their NPA burden and increasing margins as the USA was reporting failures of several of its big banks. Perhaps this explains why, despite global headwinds, India’s economy has shown resilience, benefiting from the ongoing fiscal consolidation, strong financial systems, expanding exports and foreign exchange reserves, moderating inflation, and continued growth momentum. Despite a global financial crisis, Indian scheduled commercial banks (SCBs) have been able to reduce their non-performing assets, which have long been seen as the main culprit. In 2022-23, the gross non-performing assets (GNPA) of SCBs reached their decadal low. By lowering the percentage of non-performing assets, Indian banks have successfully increased the quality of their assets. The gross non-performing assets ratio for SCBs dropped to a 10-year low of 3.9% in March 2023 as they continued to improve the quality of their assets. A level last seen in June 2011 was reached by the net non-performing assets (NNPA) ratio, which also increased to 1.0%. SCBs’ gross non-performing assets (GNPA) ratio continued its downtrend and fell to a 10-year low of 3.9% in March 2023, and the net non-performing assets (NNPA) ratio declined to 1.0%². By the end of the current fiscal year, the Reserve Bank of India (RBI) now anticipates a further decrease in the non-performing assets ratio to almost 3.6%. State Bank of India (SBI), the biggest public-sector lender in India, registered a 59% year-on-year (YoY) increase in its business and profit margins in the fiscal year 2022-23. SBI reported a net profit of Rs 50,232 crore in the financial year 2022-23, a rise of almost 59% as compared to the financial year 2021-22. But SBI was not the only example; most of the SCBs performed remarkably well last year. Public sector banks such as Bank of Baroda, Canara Bank, Bank of India, Bank of Maharashtra, and the Central Bank of India, to name some, have all reaped record levels of profit last year. At the other end, the private sector banks, including HDFC Bank, ICICI Bank and Axis Bank too, had a fantastic 2022-23 on record. A good financial performance has improved the Banking Stability Indicator (BSI), which assesses the state of the domestic banking system as reported by RBI. The stability of the banking sector improved in the second half of 2022-2023, as asset quality improved with NPAs reaching a decadal low.

Business growth has picked up significantly, which has contributed to improving banks’ margins and NPAs. SCBs saw impressive credit growth, which was driven by both PSBs and private banks, with credit growth reaching 15.4%, above the 15% threshold, registering a broad-based increase of 22.2% in the year-to-year comparison. Moreover, the aggregate deposit growth experienced a slight rise in comparison with the previous two years and crossed the 10% mark, reaching 11.8% as of June 2, 2023³. Today, the banking sector is much more than just providing liquidity to the financial system – its role in controlling inflation is of crucial importance.

Monetary policy tightening, combined with supply-side measures, has helped contain inflation in India, even as the global economy continues to experience high retail prices. According to the latest RBI’s Inflation Expectations Survey (June 2023)⁴, households’ inflation expectations have been on a declining trend since September 2022. By raising policy rates, the central bank has managed to bring down inflation in India at a time when many other countries, despite repeatedly raising policy rates, continue to struggle with high inflation rates. India’s retail inflation eased to 4.25% in May, a low for a 25-month period and below the RBI’s upper tolerance level of 6% for the third month in a row. The May retail inflation was down from 4.7% in April 2023 and from 7.04 % in the same month last year.

Most of the micro, small and medium enterprises (MSMEs) rely primarily on banks for funding. Indian banks appear to have been able to sustain a consistent credit flow to the sector – lending to MSMEs in 2022-23 ranged from 13.8% to 18.9%. Overall, lending to the sector has been supported by institutional support, including the Emergency Credit Line Guarantee Scheme (ECLGS) and regulatory changes to the definition of small and medium enterprises. Asset quality in the portfolio of the SMEs of the state-owned commercial banks (SCBs) improved significantly in 2022-23, with the gross national product (GNP) ratio declining from 9.3% to 6.8% in the same period. The GNP ratio for advances under Rs. 25 crores, which are prone to slippages, also declined, going from 7.2 % to 6.7% between March 2022 – March 2023. The MSME sector’s performance is another significant achievement in this regard.

Amidst the turmoil that engulfed some of the world’s largest banks in March of last year in both the USA and Europe, money managers continue to have faith in India’s banking sector, which has done exceptionally well in terms of reducing non-performing loans (NPAs), improving asset quality and increasing profit margins. Foreign direct investment (FDI) inflows into India increased 10% in 2022 from US$46.7 billion to US$47.3 billion, according to the latest edition of the 2023 UNCTAD World Investment Report⁵. This reflects foreign investors’ confidence in India’s financial sector.

Only time will tell how well India manages to hold on to this performance.

Author: Sovik Mukherjee

The author is an Assistant Professor in Economics at the Faculty of Commerce & Management, St. Xavier’s University, Kolkata, West Bengal, INDIA.

Footnotes:

1. https://www.un.org/development/desa/dpad/document_gem/global-economic-monitoring-unit/world-economic-situation-and-prospects-wesp-report/ ↩︎
2. https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1238 ↩︎
3. https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=55943 ↩︎
4. https://www.rbi.org.in/scripts/PublicationsView.aspx?id=21776 ↩︎
5. https://unctad.org/publication/world-investment-report-2023 ↩︎