Reserve Bank of India has published their Financial Stability Report on 30.12.2024 which predicts a Resilient Indian Economy and the economy is expected to improve after the recent slowdown in GDP growth with confidence of the consumer segment and business segment showing high growth level. The new RBI Governor Sanjay Malhotra exuberated, “Consumer and business confidence for the year ahead remains high and the investment scenario is bright”. RBI report further highlighted that GDP is projected to recover in Q3 and Q4 of financial year ending 2025. Structural growth is likely remail intact. Expected bumper Kharif harvest and rabi crop prospects likely to soften food grain prices. Revival in rural consumption, government spending and service exports expected to drive growth.
World Bank also has raised India’s FY 25 GDP forecast to 7% from 6.6% with medium-term outlook to remain positive, with strong growth projected for FY 26 and FY 27. The current account deficit is expected to stay within 1- 1.6% of GDP and declining inflation and growth to reduce extreme poverty in India. The adjustment reflects the strong performance of the Indian economy, which was the fastest-growing major economy in FY24 with an 8.2% growth rate.
"India was the fastest growing economy in FY24 at 8.2%, and now it's growing at a good pace," remarked Auguste Tano Kouame, the World Bank's Country Director for India. He also noted that global growth remains subdued compared to pre-pandemic levels.
In spite of the projecting an optimistic forecast of the Indian economy being the fastest growing economy globally and also the overall asset quality in the banking system continues to improve, Reserve Bank of India’s (RBI) Financial Stability Report flagged the issue of write-offs by private banks, saying these could partly mask worsening asset quality in the retail loan segment and a dilution in underwriting standards. The Financial Stability Report further states, “Stress test results on asset quality indicated that the aggregate GNPA ratio of 46 banks may rise from 2.6% in September 2024 to 3% in March 2026 under the baseline scenario and further to 5% and 5.3%, respectively, under adverse scenario 1 and adverse scenario 2.” As against the previous Financial Stability Report the aggregate GNPA ratio across all SCBs might improve to 2.5 % by March 2025 under the baseline scenario.
On the capital adequacy, results reveal that the aggregate capital adequacy ratio (CAR) of 46 major SCBs may decline from 16.6 % in September 2024 to 16.5% by March 2026 under the baseline scenario and to 15.7% under adverse scenario.
RBI report also pointed out the delinquencies being faced by microfinance and stated that “the asset quality of the sector deteriorated in the first half of FY 2025, with the share of loans overdue between 31 to 180 days doubling to 4.3% at the end of September 2024 from 2.15% at the end of March 2024.” Along with it, the borrower indebtedness also increased significantly. RBI foresee an increase in the NPA level in the days to come. Further the credit deposit ratio showing constraints under the current economic scenario and viewed in the geo-political uncertainties, how the impact of such anticipated adverse features is going to affect the global and national economy cannot be envisaged.
Indiscriminate write offs leads to concealment of real cause of accounts becoming NPAs. The report also concerned about the deteriorating asset quality showing signs of increasing stress in the microfinancing sector. Risk of delinquency level is inherent in every type of loan, secured or unsecured, which is more under unsecured loans. But the delinquencies are caused more by the non-compliance of guidelines and notifications and statutory provisions of the Regulatory Entities by the Regulated Entities. It may be recalled that the former Governor of RBI Shaktikanta Das expressed his concern over non-compliance of regulatory standards set up by regulatory entities by the regulated entities and warned the regulated entities of stringent action to be taken against non-compliance function. Hence, the only way to arrest the trend is to deal with the matter with stringent deterrence.
The importance of regulatory notifications of RBI and other statutory provisions and how their non-compliance affect the quality of assets of the regulated entities can be judged only through understanding the letter and spirit of such regulatory provisions and depending upon how and whether such guidelines are being implemented diligently, sincerely and consciencely or not. The Financial Stability Report is also categorically state, “Domestic regulatory initiatives continue to focus on the resilience of financial intermediaries, bolstering efficiency within financial markets, implementing global best practices, streamlining regulatory compliance processes, and enhancing customer protection measures.”
A perusal of the monetary penalty imposed by RBI citing non-compliance with or contravention of statutory provisions and other directions issued by RBI will reveal without any ambiguity that the regulated entities are habitual offenders for their non-compliance of RBI guidelines and notifications which is one of the major and important undeniable reasons for accounts becoming NPAs. The following statistics show the monetary penalty imposed by RBI for the period December 2021 to May 2014 showing the seriousness of the situation. Unless some drastic steps are taken to arrest the trend, situation may go out of control culminating in facing serious crisis.
Source: Financial Stability Report
Period | No of regulated entities | Penalty Amount imposed (Rs. in Crores.) |
December 2021 to May 2022 | 74 | 9.98 |
June 2022 to November 2022 | 105 | 24.57 |
December 2022 to May 2023 | 122 | 26.34 |
June 2023 to November 2023 | 146 | 57.07 |
December 2023 to May 2024 | 161 | 22.83 |
Total | 608 | 140.79 |
The figures speak for themselves. Such non-compliance by the regulated entities come to light only during the periodical inspections conducted by RBI which means many such unbecoming acts by the regulated entities are not brought out in the open. The most unfortunate fact is that when such violations are brought out by the borrowers to the notice of the respective regulated entities, they do not even bother to look into it and when such points are raised during legal proceedings in the Tribunals during the trials under recovery Acts, they do not take any cognizance of such violations and the regulated entities are allowed to go with impunity. The end result is the miscarriage of justice. New regulatory notifications or updating the already issued notifications by the RBI and other regulatory authorities are being issued from time to time which are mandatory for the regulated entities to comply with failing which they are penalised. The penalties are paid by the regulated entities out of the public funds for which the banks are the custodians which amounts to facilitating wrong doings and the wrong doers go Scot-Free.
What is required is an immediate action to arrest the trend. It is said, “To look is one thing. To see what you look at is another. To understand what you see is a third. To learn from what you understand is still something else. But to act on what you learn is all that really matters. Isn’t it?” It is to be remembered that anything can be achieved through action, perseverance and facing challenges squarely because action is the foundation to success.
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