Indian scheduled commercial banks have delivered stellar growth in the fourth quarter of FY23, but recent statements made by the RBI Governor have cast aspersions on these numbers. The RBI Governor has reiterated in various forums that the boards of banks and the audit committees should check the propensity to show good profits through smart accounting and window dressing. If the RBI is indeed aware that such practices are being followed, it would be best to end these through stern directives to banks, in the interest of all stakeholders.
The financial results of the banking sector have been truly outstanding in the fourth quarter of FY23, and it is not surprising that the central bank has been aroused into taking notice. Profit after tax at aggregate level of scheduled commercial banks was up around 51 per cent; public sector banks reported their historically best quarter with a 98 per cent increase in net profit while private sector banks grew their profits 26 per cent. Other parameters of the banking sector were also robust — gross non-performing assets ratio has halved since the peak in FY21 to 4.7 per cent for public sector banks and 2 per cent for private banks, provisions for loans are quite healthy across banks, and cheque bounce rate has reduced from the high of 33 per cent in FY21 to 22 per cent now.
Various factors could have aided banks last fiscal year. Reopening of the economy and the surge in consumption as the pandemic ebbed increased demand for credit. Credit growth has been very strong over the last year, standing at 15.5 per cent in May 2023. Two, margins of the banking sector improved with net interest income growing 28 per cent in Q4 of 2023, largely due to the slower transmission of RBI’s rate hikes to bank deposits and, three, availability of adequate liquidity and lesser NPA formation aided profitability too. The RBI is however sceptical about this rosy performance because the banks are not displaying signs of stress in their loans book despite the central bank hiking repo rate by 250 basis points since last May.
Also, segments such as unsecured personal loans, credit card loans and MSME loans which are more vulnerable, registered a higher credit growth compared to other categories since the pandemic. Borrowers in these segments would typically struggle with their repayment obligations in a rising rate cycle. If banks are using methods such as entering into structured deals with a stressed borrower to conceal the bad loan, using internal accounts to adjust the borrower’s repayment obligations and disbursing new loans closer to the repayment date, the RBI should take stern steps against these banks. Not only do these practices mislead all stakeholders regarding the true health of the balance sheet, but they also pose a threat to banks’ sustainability. Merely casting aspersions on the credibility of the banking sector figures does not help at all.