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Despite the recent decline in impaired assets and a significant improvement in provisioning, profitability of the banking sector remains fragile, according to Reserve Bank of India Governor Shaktikanta Das.
The capital position of banks has, however, improved on account of recapitalisation of public sector banks by the government and capital-raising efforts by private sector banks, the Governor said at an event organised by a media house.
Nevertheless, the banking sector continues to encounter challenges from events like those around the telecom sector, he added.
“Consequently, the overhang of non-performing assets (NPAs) remains relatively high which is weighing on credit growth.
“Also, in view of subdued profitability and deleveraging by certain corporates, risk-averse banks have shifted their focus away from large infrastructure and industrial loans towards retail loans. This diversification strategy, while helpful as a risk mitigation tool, has its own limitations,” the Governor said.
Further, sector specific pockets of stress need policy attention. At the same time, Das emphasised that proper due diligence and risk pricing in lending is of prime importance, so that the health of the banking sector is not compromised while ensuring adequate flow of credit to productive sectors of the economy.
The banking stability indicator, as reported in RBI’s Financial Stability Report of December 2019 , shows an improvement. The Governor underscrored that timely mitigation measures like faster resolution, and better recovery, among others, need to be continued to bring down the gross non-performing assets (GNPA) ratios of all scheduled commercial banks (SCBs).
“While lower rate of credit growth limits the size of the denominator for measuring GNPA, risks arising out of global and domestic economic conditions and geo-political developments persist,” he said.
On the resolution front, Das said some progress has been made in terms of the notification issued by the Central Government under Section 227 of the IBC.
“We may, however, expect to have an integrated framework for resolution of financial firms operating in India in the near future. The implementation of this reform is of particular importance for having a resilient financial system in India,” he added.
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