The deterioration in asset quality of Indian banks, especially that of Public Sector Banks (PSBs), can be traced to the credit boom of 2006-2011 when bank lending grew at an average rate of over 20 per cent.
Other factors that contributed to the deterioration in asset quality were adverse macro-financial environment; lax credit appraisal and post-sanction monitoring standards; project delays and cost overruns; and the absence of a strong bankruptcy regime until May 2016.
The recognition of non-performing assets improved, leading to a sharp rise in the gross NPA ratio from 4.3 per cent at end-March 2015 to 7.5 per cent at end-March 2016. It further reached the peak of 11.5 per cent in March 2018.
Recent supervisory data suggests that various efforts made by the Reserve Bank in strengthening its regulatory and supervisory framework and the resolution mechanism instituted through Insolvency and Bankruptcy Code (IBC) are bearing fruit. This is reflected in significant improvement in asset quality of scheduled commercial banks (SCBs) during 2018-19 as gross NPA ratio declined to 9.3 per cent as on March 2019.
At the same time, there has been an improvement in provision coverage ratio (PCR) of SCBs to 60.9 per cent at end-March 2019 from 48.3 per cent at end-March 2018 and 44.0 per cent at end-March 2015.
Due to weak capital position of banks and risk aversion on their part, credit growth remained subdued in recent years. However, with incipient sign of improvement in the health of banks, credit growth is picking up.
As of March 2019, the capital to risk-weighted assets ratio (CRAR) of scheduled commercial banks (SCBs) at 14.2 per cent remains well above the regulatory requirement of 9.0 per cent. However, if we take into account the capital conservation buffer (CCB), some banks, especially Public-Sector Banks (PSBs), are falling short of the required 10.875 per cent. Overall, the Government’s efforts to infuse capital into PSBs has significantly helped them achieve these targets.
(Speech delivered by Shaktikanta Das, Governor, Reserve Bank of India titled Indian Banking Sector: Current Status and the Way Forward)