The Reserve Bank of India’s latest Financial Stability Report (FSR) shows Indian banks have grown past the mistakes of the last credit cycle marked by corporate excesses, massive loan write offs and a period of living under intense regulatory scrutiny.
Let’s look at the numbers. Gross non-performing assets have fallen to 1.8%, their lowest level in decades. Net NPAs have shrunk to 0.4%, suggesting that the stock of unresolved stress has become remarkably small. Capital adequacy stands at 17.7%, while common equity capital is comfortably above regulatory requirements. Collectively, banks generated more than Rs four lakh crore in profits over the past year.
In simple words, this means banks are no longer in recovery mode but is clearly on a growth path. Not too long ago, capital was scarce, provisioning consumed earnings and large corporate defaults dominated headlines. Public sector banks required repeated government recapitalisation, while private lenders were forced to tighten underwriting standards after discovering that rapid loan growth often comes with hidden risks. The clean-up was painful, politically contentious and expensive. Looking back, it also appears to have been necessary.
The RBI stress tests show that even under severe macroeconomic shocks, the banking system remains comfortably above minimum capital requirements. Stress tests are exercises in imagining what happens when things go wrong. It does suggest that today’s banks are far better prepared for one than they were a decade ago.
Going ahead, the concern is unsecured retail credit. Personal loans and credit cards have grown rapidly over the past few years, prompting the RBI to repeatedly caution lenders against complacency. Once again, the data suggests that this pocket needs closer attention.
The widening credit-deposit growth figures are another point of debate. Credit continues to grow faster than deposits. That gap cannot widen indefinitely. Banks are already competing harder for household savings, pushing up deposit rates and increasing funding costs. If policy rates soften over the next year, maintaining today’s record profitability may prove more difficult than investors currently expect. The easy gains from widening lending spreads are largely behind us.
The latest Financial Stability Report is therefore less a victory lap than a reminder of what disciplined regulation can achieve. Indian banks have finally earned the market’s confidence. The challenge now is ensuring that confidence does not become the foundation for the next wave of excess.