Swaminathan J, deputy governor of the Reserve Bank of India (RBI) at the 10th edition of the SBI Banking & Economics Conclave in Mumbai today, said as compared to five years ago, the Indian banks have shown commendable strength and viability as of September 2023.  “As compared to 2018 when 12 banks were placed under the Prompt Corrective Action (PCA) framework, today no SCB is under PCA,” says Swaminathan. 

The Capital to Risk Weighted Assets Ratio of Scheduled Commercial Banks stood at 16.79%. The Gross Non-Performing Assets (GNPA) were at a decade-low of 3.25%, coupled with Net NPAs at 0.76%, reflecting a marked improvement over the past five years, he says.

Profitability indicators signal a positive trajectory, with Return on Assets at 1.3% and Return on Equity at 12.5%, continuing an upward trend for the fourth consecutive year. The absence of any Scheduled Commercial Bank (SCB) under the Prompt Corrective Action (PCA) framework, in contrast to the scenario in 2018 when 12 banks were placed under the PCA framework, underscores the sector's progress, he adds.

Interest Rate Risk

The RBI deputy governor also delved into critical areas requiring attention. The recent regulatory changes, particularly in the treatment of fair value gains and losses, and the removal of restrictions on HTM have enhanced banks' flexibility in managing this risk in their investment portfolios, he says, adding that the sustainability of the current NIMs is uncertain, especially when the interest rate cycle reverses. 

External benchmark-linked loans will be repriced much faster than deposits contracted during the peak of the interest rate cycle resulting in pressure on NIMs and eventually profitability.

On the evolving business landscape, he says boards of banks and Non-Banking Financial Companies (NBFCs) must set up sectoral and sub sectoral exposure limits to mitigate concentration risk and uphold underwriting standards. 

“Banks and NBFCs should exercise caution in relying solely on preset algorithms, ensuring that these models are robust, regularly tested, and recalibrated as needed to maintain robust underwriting standards,” he says.

On operational resilience, he observes that many banks have not been spending fully, the budget earmarked for procurement of IT systems and IT security systems.

Highlighting the outsourcing risks, the RBI deputy governor says banks must remain vigilant and retain responsibility for the activities of service providers. “As the RBI has time and again reiterated, outsourcing does not absolve a bank of any of its obligations and they continue to remain ultimately responsible for the activities of their service providers including recovery agents,” he adds.

Customer protection remains paramount, he says. “Customer complaints should only be rejected after careful examination by the Internal Ombudsman. To do this effectively, regulated entities must ensure that the Internal Ombudsman is adequately resourced.”

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