The Comeback of India's Banking Sector
Introduction
The Operation and
Economic growth of an economy is greatly influenced by the banking sector.
Banks are crucial in the development and execution of financial policy in any
economic system.
The
major milestone of the Banking sector- The Reserve Bank of India joined the
system in 1935, and in 1949 it took control as the system's watchdog and
regulator. 14 significant commercial banks in India were nationalized as a
result of the Nationalization of Banks Act of 1964. The Liberalization,
Privatization, and Globalization Policy were established by P. V. Narasimha Rao
in 1991. As a result, international banks were added to the country. For
financial companies, the licensing, taxation, incorporation process, etc.
became more flexible.
The last two decades have seen a paradigm shift in the banking industry in India. It has advanced significantly in terms of asset quality, technology, and laws.In India's banking industry, tensions are swiftly diffusing. Credit costs are falling due to India's banking sector's recovery, and loan growth is fueled by improved asset quality and rising demand.
Reasons for the strong comeback of India's Banking
Sector
India's economic growth rate, which is expected to stay around (6%-7% annually) in emerging markets, is one of the main factors. Along with it, by March 31 2024, non-performing loans in the banking sector, or weak loans, are anticipated to fall to 4% to 4.5% of gross loans making the overall asset quality improve as compared to 5% in September 2022. High-interest rates combined with increased net interest margins have increased returns on average assets over pre-pandemic levels.
Even though
low-income people and the SME sector continue to be at risk from rising
interest rates and increased inflation. These risks, however, are minimal.
Concerns for the future
Amidst
the ongoing constructive and fruitful trajectory, the banking sector is
witnessing, certain concerns exist.
● Lenders may charge a higher interest rate to borrowers who are more likely to default which gives us the essence of how important it is to adequately price the credit risk to better serve the consumers across the risk spectrum. But, as per the SBI report, Banks are not adequately pricing in credit risk evenly as liquidity remains significantly downsized and credit demand is at a decadal high.
● Shaktikanta Das, the RBI Governor has recently mentioned that the banks could not perennially rely on Central Bank's money to support credit offtake. As a result, they would have to mobilize their funds and resources which is again a risky affair.
● There exists a need for watchful behavior to track any irrational exuberance in the credit segment as there is a worry that certain state undertakings probably believe that they are the proxy sovereigns who would give loans without the right kind of underwriting. This leads to an emerging possibility of some banks ending up with higher non-performing asset levels once again.
Conclusion
In the post-covid set-up, the way the banking sector has resorted to digitization and adaptation of disruptive technology such as Artificial Intelligence, we can say that this sector will remain in the purple patch, but banks need to aggressively raise their deposits in the days ahead and garner durable liquidity to meet the rising credit demand as well as ensure that underwriting remains as credible as possible!
References
- https://m.economictimes.com/industry/banking/finance/banking/how-goes-the-banking-sector/articleshow/95642764.cms
- https://www.businesstoday.in/interactive/longread/how-india-s-banking-sector-is-staging-a-strong-comeback-232-19-01-2023#:~:text=The%20net%20profits%20of%20the,the%20corresponding%20period%20last%20year.
- https://www.business-standard.com/article/economy-policy/fy22-ends-with-bank-credit-growth-of-8-6-retail-agri-mainstay-122040800061_1.html
- https://data-flair.training/blogs/banking-sector-reforms-and-acts-in-india/
- https://www.investopedia.com/terms/c/creditrisk.asp
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