Credit growth challenges to delay in NPA resolution; top 10 banking trends from RBI annual report

The Reserve Bank of India's (RBI) annual report on trends and progress of banking in India  has raised concerns over the bad loan resolution, corporate governance issues in banks and the weak structure of urban cooperative banks. The 194-page  report also raises the possibility of defaults in retail assets amid economic slowdown. Here are 10 takeaways from the RBI report:   

Bad loan resolution, frauds and corporate governance among big concerns

The key financial indicators of the banks are showing signs of improvement. However, concerns  remain on delay in bad loan resolutions, corporate governance and frauds.  The stress  in non-banking financial companies (NBFCs) and cooperative banks has also impacted the  confidence of investors in the financial system. The report stresses the need for building a robust banking system with strong balance sheet  to withstand systemic risks.

Challenges in balancing the regulatory framework for fintech  and big tech in banking

The rise of fintech and big tech firms with cutting edge innovation that are posing a challenge to traditional banking is a concern for banking regulators  around the world.  The challenge is in finding the right balance between promoting innovation and applying a uniform supervisory and regulatory framework for all.  The new regulatory framework for  new tech players may not show immediate results, but are expected to pay back in the medium to long run.

Policy challenges with few large PSBs and the NBFC sector  

The government decision to merge some of public sector banks (PSBs) is likely to transform the face of the banking sector.  The NBFCs are also expected to regain their niche in the financial system. The need of the hour is to continue the policy co-ordination with a view to develop a vibrant and secure banking system and a competitive and resilient NBFC sector.

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Credit growth challenges in the economy

The banking sector is slowly turning around on the back of improvement in the asset quality, strengthening capital base, and a return to profitability, but slowdown in the economy poses new challenges to credit growth. In fact, further reduction of NPAs through recoveries hinges around a reversal of the downturn in the economy.

Possibility of defaults in retail assets

The banks have  been quite successful in orienting their lending from corporate to relatively stress-free retail, but the slowdown in private consumption spending has imposed limits to this growth strategy in future  even as the possibility of defaults among retail segments rises as growth slows down.

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Failure of private banks in corporate governance

The recapitalisation of PSBs remains an unfinished agenda. Commercial banks need to augment their capital base beyond  minimum regulatory requirement to guard against the future balance sheet stress.  Over the last couple of years, the space vacated by risk-averse PSBs was taken up by private banks. However, fault lines are becoming evident in the latter's corporate governance. This occurs at a time when the balance sheets of PSBs have not yet regained strength.

New banking platforms to help in financial inclusion

The emergence of niche players, especially payments  banks and small finance banks, is expected to augment innovation in financial technology and provide further impetus to the agenda of financial inclusion.

Uniform regulatory and supervisory framework for cooperative banks  

Punjab and Maharashtra Co-operative (PMC) Bank recently hit headlines due to financial irregularities. The issue brought to the fore the challenges related to low capital base, weak corporate governance, inability to prevent frauds, slower adoption of new technology and inadequate system of checks and balances. Going forward, the highest priority should be given to establishing a uniform regulatory and supervisory structure.

Cooperative banks versus commercial banks  and small finance banks

The co-operative sector faces dual challenges - first, increasing competition from small cooperative banks, small finance banks and payments banks, and second, vulnerability stemming from internal weaknesses including the inability to prevent frauds.

Need for continuous vigil on NBFC sector post IL&FS default  

The balance sheet size of the NBFCs constitutes 18.6 per cent of commercial banks. That sais, they are an important pillar of the Indian financial system. Going forward, the RBI will continue maintaining a constant vigil over NBFCs to take necessary steps to ensure financial stability.