Addressing the 10th edition of the SBI Banking & Economics Conclave in Mumbai today, Reserve Bank of India (RBI) Deputy Governor Swaminathan J said Indian banks have shown commendable strength and profitability since September 2023 compared to five years ago “Compared to 2018, when 12 banks were subject to the Prompt Corrective Action (PCA) framework, today no SCB is subject to the PCA,” says Swaminathan.

The ratio of capital to risk-weighted assets of regular commercial banks was 16.79%. Gross non-performing assets (GNPA) were at a decade low of 3.25% while net NPAs were at 0.76%, reflecting significant improvement over the last five years, he said.

The profitability indicators point to a positive development: the return on assets is at 1.3% and the return on equity is at 12.5%, continuing the upward trend for the fourth year in a row. The absence of a Scheduled Commercial Bank (SCB) under the Prompt Corrective Action (PCA) framework – unlike the scenario in 2018 when 12 banks were brought under the PCA framework – highlights the progress of the sector, he added.

Interest rate risk

The RBI Deputy Governor also highlighted critical areas that require attention. Recent regulatory changes, particularly in the treatment of fair value gains and losses, and the removal of HTM restrictions have increased banks' flexibility in managing this risk in their investment portfolios, he says, adding that sustainability the current NIMs are uncertain, especially if the interest rate cycle reverses.

External benchmark-linked loans are repriced much faster than deposits contracted during the peak of the interest rate cycle, putting pressure on NIMs and ultimately profitability.

In view of the evolving business landscape, he says boards of banks and non-banking financial companies (NBFCs) need to set sectoral and sub-sectoral risk limits to mitigate concentration risk and maintain underwriting standards.

“Banks and NBFCs should exercise caution and rely solely on preset algorithms and ensure that these models are robust, regularly tested and recalibrated as necessary to maintain robust underwriting standards,” he says.

In terms of operational resilience, he notes that many banks have not fully spent the budget allocated for the procurement of IT systems and IT security systems.

Highlighting outsourcing risks, the RBI deputy governor said banks need to remain vigilant and maintain responsibility for the activities of service providers. “As RBI has reiterated time and again, outsourcing does not relieve a bank of its obligations and they continue to remain ultimately responsible for the activities of their service providers, including debt collectors,” he added.

Protecting customers remains the top priority, he says. “Customer complaints should only be rejected after careful review by the Internal Ombudsman. To do this effectively, regulated companies must ensure that the internal ombudsman is adequately resourced.”