The Reserve Bank of India’s (RBI) latest Financial Stability Report (FSR) for June 2024 highlights the strength of India’s financial system in navigating global uncertainties. However, the report also flags growing concerns over the rapid expansion of digital personal loans and their potential threat to financial stability.
Key Insights from the June 2024 FSR
Global Financial and Economic Risks
The global economy is showing resilience in the face of significant risks and uncertainties.
- The International Monetary Fund (IMF) expects global growth to hold steady at 3.2% in 2024, while the World Bank predicts a slightly lower growth rate of 2.6%.
- Despite improving near-term outlooks, challenges persist, including the final stages of disinflation, high levels of public debt, inflated asset valuations, economic fragmentation, geopolitical conflicts, climate-related disasters, and the growing threat of cyberattacks.
- Emerging market economies (EMEs) are particularly vulnerable to external shocks and spillover effects.
Domestic Economic and Financial Stability
India’s solid macroeconomic fundamentals and stable financial system have played a crucial role in sustaining economic growth.
- Lower inflation, a strong external position, and ongoing fiscal consolidation efforts are contributing to increased business and consumer confidence.
- The financial sector’s strength is supported by healthy balance sheets across institutions, characterized by robust capital buffers, improving asset quality, sufficient provisioning, and strong earnings.
Improvement in Asset Quality
Scheduled commercial banks (SCBs) have seen their gross non-performing asset (GNPA) ratio drop to 2.8% in March 2024, the lowest in over a decade. The net NPA (NNPA) ratio has also reached a historic low of 0.6%.
- According to stress test scenarios, the GNPA ratio is expected to further decline to 2.5% by March 2025.
- However, under a scenario of significant macroeconomic deterioration, the GNPA ratio could rise to 3.4%. Public sector banks (PSBs), in particular, could see their GNPA ratio increase from 3.7% in March 2024 to 4.1% by March 2025.
- The agriculture sector continues to have the highest GNPA ratio at 6.2%, while personal loans have a lower GNPA ratio of 1.2%. The RBI remains cautious about the financial risks posed by personal loans, especially those facilitated through digital platforms.
Trends in Deposits and Credit Growth
Deposit growth picked up pace in the second half of FY24, reaching 13.5% by the end of March 2024.
- Private sector banks led the growth with a 20.1% increase in deposits, followed by foreign banks at 15.1% and PSU banks at 9.6%.
- While overall credit growth remained robust at 19.2%, it was slightly lower than in the previous half-year.
- Consumer loans, although moderated due to regulatory interventions, continued to represent the largest share of the lending portfolio at 32.9%.
Capital Adequacy and Profitability
Scheduled commercial banks (SCBs) continue to maintain strong capital buffers, with the capital to risk-weighted assets ratio (CRAR) stable at 16.8%.
- PSBs have shown improvement in their CRAR, while private and foreign banks have experienced a slight decline.
- Return on assets (RoA) and Return on Equity (RoE) are both near their highest levels in a decade, at 1.3% and 13.8%, respectively.
Resilience Demonstrated in Stress Tests
The stress tests conducted by the RBI reveal that banks are well-prepared to withstand macroeconomic shocks, even in medium and severe stress scenarios.
- These tests, designed to assess the ability of banks and the broader financial system to endure adverse economic conditions, indicate that SCBs are adequately capitalized.
Growing Interconnectedness Among Financial Entities
The report also highlights an increase in interconnectedness within the financial sector, especially through bilateral exposures.
- This trend was particularly noticeable in the latter half of 2023-24, driven by increased exposure between asset management companies, mutual funds (AMC-MFs), and scheduled commercial banks (SCBs), as well as greater involvement of all-India financial institutions with SCBs.
Concerns Over Digital Personal Loans
The Rise of Digital Personal Loans
Digital personal loans have seen rapid growth, particularly through apps, and now account for the highest share of overdue accounts, raising alarms about their potential impact on financial stability.
- The explosion of instant loan apps, especially targeting younger, digitally-savvy consumers, has led to concerns about a growing debt trap.
- By 2023, the digital lending market had expanded significantly, reaching an estimated value of USD 350 billion.
Impact on the Banking Sector
The increasing share of retail loans, particularly through digital channels, now exceeds that of both industrial and service loans.
- Despite regulatory measures, the GNPA ratio for personal loans has been steadily decreasing, reaching 1.2% in March 2024.
- However, the rapid expansion of retail lending, especially via digital platforms, poses risks of higher delinquency and financial strain on borrowers.
RBI’s Perspective
- Fresh slippages from retail loans, excluding home loans, have been growing rapidly, accounting for 40% of new NPAs in FY24.
- The highest delinquency rates are observed among borrowers under 25, highlighting concerns about the sustainability of digital lending practices.
Strategies for Recovering Digital Personal Loans
Leveraging Financial Technology
- Encourage fintech companies to develop tools for automated repayment plans and debt consolidation to facilitate recovery.
- Implement continuous monitoring to detect potential delinquencies early.
Assessing Creditworthiness
- Explore new credit scoring models that consider a broader range of factors, such as income stability and financial behavior, beyond traditional credit histories.
Enhancing Efficiency
- Streamline digital NPA recovery processes by automating tasks like communication and data analysis, allowing resources to be allocated more effectively.
Legal Frameworks for Recovery
- Utilize Debt Recovery Tribunals (DRT) and leverage legal mechanisms like Lok Adalat and the SARFAESI Act, 2002, to expedite recovery.
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