Indian banking sector’s improvements and challenges

Source: The post Indian banking sector’s improvements and challenges has been created, based on the article “Express View on Indian banking system: In good health” published in “Indian Express” on 2nd January 2025

UPSC Syllabus Topic: GS Paper 3- Indian Economy and issues relating to planning, mobilisation  of resources.

Context: The article discusses the Indian banking sector’s improvements and challenges. It mentions a reduction in bad loans and higher profits but highlights increasing stress in unsecured retail loans and microfinance. It also points out issues like rising household debt and potential vulnerabilities in large borrower segments. Indian banking sector’s improvements and challenges

For detailed information on Factors that contributed to the stability of India’s banking sector read this article here

What is the Current State of Bank Asset Quality?

1. As of September 2024, Indian banks have seen their bad loans drop to a 12-year low at 2.6%. This improvement spans across all sectors, showing a healthier banking environment.
2. Banks have also increased their profitability, maintaining high provision coverage ratios and strong capital positions.
3. Stress tests by the RBI indicate that even under adverse economic conditions, most banks would remain well-capitalized, although four banks might struggle to meet the minimum capital requirement.

Where are the Problems in the Banking Sector?

1. There are increasing concerns in the unsecured retail loan sector, where there has been a significant rise in write-offs. More than half of the new bad loans in this segment stem from unsecured loans.
2. The micro-finance sector, which serves low-income households, is showing signs of stress with a high share of stressed loans and high impairment rates among borrowers with multiple loans.
3. Additionally, consumer credit data reveals that 11% of borrowers with personal loans under Rs 50,000 were overdue, and 60% had taken more than three loans in the current financial year, indicating growing household debt.
4. Gold loan non-performing assets increased by 30% to Rs 6,696 crore by June 2024 from Rs 5,149 three months earlier, highlighting rising distress in this segment.

Are There Concerns with Large Borrowers?

1. While bad loans among large borrowers have decreased from 4.5% in March 2023 to 2.4% in September 2024, there is an observed increase in loans overdue between 31 and 90 days.
2. The total unhedged external commercial borrowings as of September 2024 stood at $65.48 billion, pointing to potential financial exposure and vulnerabilities that need close monitoring.

Question for practice;

Discuss the potential risks associated with the increasing stress in unsecured retail loans and microfinance in the Indian banking sector.