While the Indian banking financial sector’s financial parameters such as bad loans and capital adequacy have some improvements in recent times, the overall health of banking will depend on revival in economic structures and its radical growth. The Reserve Bank of India(RBI) said in its report on trend and progress of Banking in India 2018-19.” The health of the banking sector hinges around a turnaround in macroeconomic conditions”, the report said. The growth slowdown of the country intensified with GDP growth for the second quarter of the current financial year dipping to a six-year low of 4.5%.
The report noted that during 2018-19, the asset quality of scheduled commercial banks turned around after a gap of seven years with the overhang of stressed assets declining fresh slippages arrested. As a result of the declining provisioning requirement, the banking sector returned to profitability in the first half of 2019-20. Besides, recapitalization had helped public sector banks in shoring up their capital ratios. Despite the improvement in some of these parameters, the risk-averse nature among lenders was worrisome.
The Credit Slowdown.
The slowdown of credit flow to the commercial sector in the first half of 2019-20 was evidence of the aversion to risk. In turn, this waning of confidence is weighing on overall economic activity. This is worrisome as it is taking hold at a time when the recent improvements in asset quality and profitability of the banking sector is at a nascent stage and capital ratios of the Public Sector Banks(PSBs) are shored up due to recapitalization by the government as per stated by the RBI. The report observed that capital infusion by the government in the public sector banks was just enough to meet the regulatory minimum, including capital conservation tactics. Commenting that recapitalization would be a continuous process, the RBI said that going forward the financial health of PSBs should increasingly be assessed by their ability to access capital markets rather than looking to a government as a recapitaliser of the first and last resort.
Strict governance for banks.
strict governance norms for banks are to be planned , as per the statements made by the RBI. These norms will reflect best practices. The Reserve Bank of India is planning to issue fresh corporate governance norms which which will be in lines with global best practices. The growing size and complexity of the Indian financial system underscores the significance of strengthening corporate governance standards in regulated entities. The central bank said recent governance failures in some financial entities have brought to the fore the impact of the quality of corporate governance on efficiency in allocation of resources as well as on financial stability.
Commenting on the issue of the co-operative banks, the banking regulator said given there was a pressing need for an umbrella organization for the sector which can provide liquidity and capital support to member banks and in support of this , the RBI has given approval for it’s formation.
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