The Reserve Bank has raised rates aggressively this year to keep inflation under control. | photo credit: Reuters
Against the backdrop of a highly uncertain global environment caused by globalization of inflation, energy and food shortages and synchronized tightening of monetary policy globally, the Indian economy was showing signs of gradually strengthening growth momentum, building on macroeconomic fundamentals, the Reserve Bank of India (RBI) said in the India Banking Trends and Progress Report 2021-22.
Fueled by robust credit demand in 2021-22 as in 2022-23 so far, the consolidated balance sheets of regular commercial banks (SCBs) in India recorded double-digit growth in 2021-22 after a gap of seven years , driven by credit growth, which accelerated to a ten-year high in the first half of this fiscal year ending March 2023, the RBI said in the report.
Commercial banks may have to raise deposit rates further to meet an increase in credit demand, the central bank added. The Reserve Bank has raised rates aggressively this year to keep inflation under control. While banks were quick to pass the increases on to their lending rates, deposit rates mostly lagged.
“In 2021-2022, as credit growth accelerated and deposit growth moderated, the incremental credit-to-deposit (CD) ratio reached a four-year high,” the RBI said in a statement. his report. Loans from Indian banks rose 17.5% in the two weeks to December 2 from a year earlier, while deposits rose 9.9%, according to the latest RBI data earlier. in the month.
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SCBs’ asset-weighted capital-to-risk ratio (CRAR) strengthened from 16.3% at end-March 2021 to 16.8% at end-March 2022, with all banks meeting the regulatory minimum capital requirement of 11.5%, as well as the common equity level -1 (CET-1) required ratio of 8%.
Asset quality and profitability of SCBs improved, while low slippages and high capital buffers bolstered investor confidence in banks, RBI pointed out in the report.
“The gross non-performing asset (GNPA) ratio for SCBs has declined sequentially from its peak in 2017-2018 to 5.8% at the end of March 2022, driven by lower slippages as well as a reduction in GNPAs in course,” the RBI said. .
An acceleration in revenue and a contraction in spending boosted SCB profitability in FY22, measured in terms of return on equity and return on assets, the central bank said in the report.
The financial performance of Urban Cooperative Banks (UCB) improved in 2021-22, characterized by an increase in capital buffers, a decline in the GNPA ratio and an improvement in profitability indicators.
Moreover, the results of the non-banking financial corporations (NBFC) sector improved in 2021-22 with the decline of the COVID-19 pandemic.
“With strong capital reserves, adequate provisions and ample liquidity, NBFCs are poised to grow. Nonetheless, going forward, NBFCs should be wary of rising borrowing costs as financial conditions tighten,” the RBI said in the report.
On the regulatory front, scale-based regulation is expected to strengthen NBFCs in line with the growing scope of organic consolidation in the industry.
Regarding the impact of rising interest rates on banks’ profitability, the RBI said: “In a rising interest rate environment, an increase in net interest income of banks can be expected. short-term banks, reflecting a better pass-through to lending rates”.
On the other hand, higher yields expose banks to Mark-to-Market losses on their cash investments, which decreases their non-interest income.
“The impact of higher yields on the profitability of SCBs was mitigated to some extent by the increase in the limit of SLR securities under the held-to-maturity (HTM) portfolio,” said the RBI.
(With Reuters entries)