August , 2023
Indian banks earn record profit, cut NPA ratio to a decadal low, improve asset quality amidst global financial turmoil
08:05 am

Tushar K. Mahanti

Amidst global uncertainties and a faltering global economic growth prospect, the Indian economy continues to display robust growth momentum, supported by strong macroeconomic fundamentals. The Reserve Bank of India has projected the real GDP growth at 6.5% for 2023-24 over and above the 7.2% growth it achieved last year. The International Monetary Fund has projected India’s GDP growth at 5.9% for 2023-24 while the World Bank has projected it at 6.3%.

The UN report ‘The World Economic Situation and Prospects as of mid-2023’ published last May was even more optimistic about India’s growth prospect. India's GDP is expected to grow by 6.7% in the calendar year 2024, supported by resilient domestic demand, according to the report which suggested that higher interest rates and weaker external demand will continue to weigh on investment and exports this year for the country.

There are several factors which are contributing to India’s higher growth dynamic, but probably the most important of them has been its stable and growing financial sector. India’s growth resilience has been supported by its well performing financial sector. The banking sector has done remarkably well last year against the financial turmoil experienced by the advanced economies. Heightened uncertainty persists in the global economy due to fragility in certain banking systems, geopolitical tensions, and moderating but elevated inflation world over.

Only a few months ago the world’s biggest economy, the US saw some of its big banks failed. On March 10, 2023, Silicon Valley Bank (SVB) failed after a bank run, marking the third-largest bank failure in the United States’ history and the largest since the 2007–2008 financial crisis. It was one of the three bank failures, along with Silvergate Bank and Signature Bank, in March 2023 in the US.

In March 2023, Switzerland’s Credit Suisse bank collapsed following several years of scandals. It was purchased by the Swiss rival MBS without shareholders’ approval. Switzerland will now have only one major banking institution and the country’s reputation for banking stability is shaken.

NPA ratio down to a decadal low

Interestingly, while the US was reporting failures of some of its big banks, Indian banks were busy reducing their NPA burden and multiplying margins. Maybe, this explains why amidst global headwinds, the Indian economy demonstrates resilience, benefiting from continued growth momentum, moderating inflation, rising exports and foreign exchange reserves, ongoing fiscal consolidation, and a healthy financial system.

Indeed, much of the credit for such resilience of the economy owes its origin to improved performance of the Indian banking sector. To begin with, despite a financial turmoil across the world, Indian scheduled commercial banks (SCBs) have succeeded in reducing its non-performing assets, known to be the main villain for decades.

Gross non-performing assets (GNPA) of SCBs has touched the decadal low in 2022-23. Indian banks have successfully improved their asset quality by reducing the proportion of non-performing assets. SCBs have continued to enhance their asset quality, with the gross non-performing assets ratio falling to a 10-year low of 3.9% in March 2023. Additionally, the net non-performing assets (NNPA) ratio improved to 1.0%, a level last seen in June 2011. The central bank now hopes the non-performing assets ratio to fall further to 3.6% by the end the current fiscal.

The reduction in NPA ratio was supported by significantly higher net interest margin and strong growth in net margins. The net interest margin of SCBs increased by 30 basis points in 2022-23 over the previous fiscal followed by the transmission of monetary policy tightening that caused the deposit rates to lag the lending rates. This resulted in a healthy 38.4% year-on-year growth in bank’s profit after tax driven by a significant increase in net interest income and reduced provisions.

The State Bank of India, the country’s largest public-sector lender, has reported a huge growth in its business and margins in 2022-23. The bank’s net profit witnessed a record rise of 59% from Rs 31,675 crore in 2021-22 to Rs 50232 crore last year. To note, this marks SBI’s highest-ever yearly profit.

But SBI was not an isolated 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 earned record profits last year. At the other end, the private sector banks including HDFC Bank, ICICI Bank and Axis Bank too have had a fantastic 2022-23 on record.

The good financial performance has improved the banking stability indicator (BSI), which provides an assessment of the state of the domestic banking system. During the second half of 2022-23, the soundness of the banking sector improved as capital buffers reached all-time highs. Asset quality strengthened, with multi-year lows in gross NPAs and decline in restructured assets.

Credit, deposit growth

There has been a significant improvement in businesses that helped to improve banks’ margins and non-performing assets too. SCBs witnessed a remarkable credit growth, driven equally by public sector banks and private banks. The credit growth reached an impressive 15.4% -- higher than the 15% benchmark. This was achieved with significant contributions from the personal loan segment. Personal loans, encompassing housing, credit card receivables, vehicle/auto loans, and education loans, recorded broad-based growth of 22.2% year-on-year. To note, the rising interest rate obligations have not had much impact on overall personal loan kitty. 

The aggregate deposit growth, which had experienced a slight moderation in the previous two years, regained momentum and crossed the 10% mark, reaching 11.8% as of June 2, 2023. The primary driver of this growth was private-sector banks, as term deposits attracted healthy accretions in the rising interest rate cycle. Consequently, current account and savings account deposits experienced a relative decline.

Another significant development as marked by the RBI’s latest ‘Fiscal Stability report’ was that thee retail loans have gained traction over the past three years, the share of large borrowers in the gross advances of SCBs has consistently declined – down from 51.1% in March 2020 to 46.4% in March 2023. This was largely due to the faster growth of retail loans compared to corporate borrowings. Consequently, the share of large borrowers in the GNPA of SCBs also substantially declined.

Monetary policy amidst inflation concern

Banking sector today plays a much bigger role than just supplying money to the liquidity system. For example, the monetary policy of the central bank is regarded as the best weapon to control inflation.

The Indian economy has exhibited resilience and dynamism despite formidable headwinds and an uncertain global economic outlook. But what is causing concern is the high interest rate that the banks have kept floating for nearly two years now.

The question is: Why? It is because of the high retail inflation that compelled the central bank to resort to tight monetary policy and to raise interest rates. The functioning of the commercial banks is largely guided by the RBI through bi-monthly monetary policy. In fact, this policy is widely considered as the mainstay of the day-to-day work of the banks.

Repo rate is used by monetary authorities to control

inflation. Repo rate is the rate of interest at which commercial banks borrow money from the central bank. The central bank controls the money supply in the economy by fixing the repo rate accordingly. In the event of high inflation, central banks increase repo rate as this acts as a deterrent for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.

To curb rising prices ever since the Covid-19 disrupted the supply chain, the RBI has used repo rate mechanism. It has increased repo rate by 250 basis points in a single year, between February 2022 and February 2023 and has kept unchanged at 6.5% in its latest policy meeting in June too.

A combination of monetary policy tightening and supply-side measures has succeeded in controlling inflation in India even as the world at large is still grappling with high retail prices. According to the latest households’ inflation expectations survey (June 2023) of RBI, inflation expectations of house-holds have been moderating since September 2022.

And by raising policy rates the central bank has succeeded in bringing down the inflation rate in India when many other countries are struggling with high inflation rates despite raising policy rates repeatedly. India's retail inflation eased sharply to 4.25% last May hitting a 25-month low and coming under the RBI's upper tolerance limit of 6% for the third straight month. May's retail inflation declined from 4.7% recorded in April 2023 and 7.04% in the same month a year ago.

Credit flows to MSMEs rise

The micro, small and medium enterprises (MSME) sector play a significant role in the economy by providing large scale employment and supplying ancillaries to big industries.

The MSMEs primarily depend on banks for funds. Indian banks seem to have done well to maintain a steady credit flow to this sector – credit to MSMES grew in the range of 13.8–18.9% during 2022-23. Overall, credit to the MSME sector has been sustained by strong institutional support, which includes the Emergency Credit Line Guarantee Scheme (ECLGS) and regulatory modifications in the definition of MSMEs. The asset quality of the MSME portfolio of SCBs improved significantly during 2022-23 with the GNPA ratio declining from 9.3% in March 2022 to 6.8% in March 2023.

The GNPA ratio for advances below Rs.25 crore, which are particularly vulnerable to slippage, also declined from 7.2 % to 6.7% during the period. The SMA accounts went down from 11% in March 2022 to 8.6% in March 2023.

Importantly, the improvement in asset quality has coincided with the expiry of regulatory forbearance and restructuring schemes introduced since 2018. Under the ECLGS scheme, which expired on March 31, 2023, SCBs accounted for almost ninety per cent of total disbursals (Rs 2.91 lakh crore). Contact intensive services and traders were the major sectors availing ECLGS loans.    


Investors, be foreign or domestic, all have their eyes on the banking sector performance of the country they are looking to invest in, especially, at a time when banks in developed west are facing significant challenges.

Amidst the fallout of some of the major banks in the US and in Europe last March, money managers are keeping faith in the Indian banking sector which has performed remarkably well to cut NPA ratio, improve asset quality and earn margins.

Reflecting foreign investors' faith in India’s financial sector, FDI inflows rose 10% from $44.7 billion in 2021 to $49.3 billion in 2022, said the 2023 edition of the World Investment Report released by United Nations Conference on Trade and Development (UNCTAD) recently. India was the third largest recipient of foreign direct investment (FDI) in greenfield projects in the world in 2022. 

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