Indian banks are strong enough to support growth

While the share of retail loans has increased, they are anchored in secure home loans

Close to a decade ago, India’s regulators, along with banks, teamed up to launch a surgical strike on asset quality issues plaguing the banking sector post the global financial crisis. The message was clear: The sanctity of the financial fabric was sacrosanct for the regulators, entrusted with a dual mandate of anchoring growth while safeguarding the interests of the common man and ensuring financial stability.  Similarly, the recent bulldozing of unruly payment aggregators echoes this commitment.

It is thus rather sad to see the salvos fired from select quarters now dubbing India’s financial sector as poorly regulated and questioning the integrity of the country’s top financial institutions. Irrational exuberance in coloured counter-narratives, may we say so!

First, through the last decade, and particularly in the post-pandemic period, the Indian banking system has exhibited unprecedented resilience with maturity and surpassed many challenges arising from both the domestic and global economic environment. The improvement in asset quality has been primarily led by strong macroeconomic fundamentals, effective regulatory and supervisory oversight, the creation of strong banks through mergers and capital infusion, improving governance practices while expanding the reach and quality of financial services, and enhancing the adoption of digital-heavy banking while ensuring customer interests are protected. Most importantly, this has been achieved by ensuring that the financial fabric remains well-cushioned with capital and liquidity buffers to tide over any exogenous or intrinsic shocks.

Second, the Indian financial system remains truly unique with overwhelming market dominance of heavily regulated banks, both public and private, dictating the terms of trade co-terminus with their risk appetite, while maintaining robust internal controls and remaining open to constant vigilance.

Third, the fears fanned by select quarters regarding the rapid growth of bank credit seems unfounded, as credit growth in the Indian banking system remained at 16.3 per cent in FY24 (including HDFC at 20.2 per cent), with a near secular growth across sectors, including agriculture and small and medium enterprises. While the share of retail loans has increased to 32.4 per cent from 29.5 per cent, mainly anchored by secured home loans, which grew from 14.4 per cent in April 2022 to 16.6 per cent in April 2024.

Fourth, analysing the time trend in retail loans shows no major compositional shifts since April 2021 for both the secured and unsecured portfolio of retail credit. Both segments have grown since Covid-19, with an unmasked bias towards the secured portfolio.

Fifth, the total share of unsecured retail loans remains just around one-tenth of the entire scheduled commercial banks’ credit portfolio.

Sixth, the quality of retail portfolio growth in non-banking financial companies (NBFCs), including Fintechs  and peer-to-peer, is subject to scale-based regulation of NBFCs, with 15 larger players commanding close to a quarter of the sector’s assets.

Seventh, the latest TransUnion CIBIL data on origination statistics reveals the share of prime and above cohorts stand at 41 per cent, while new-to-credit consumers are at a low level of 14 per cent.

Eighth, small-ticket personal loans of less than Rs 50,000 account for 0.3 per cent of the total retail loan book size at the industry level.

Ninth, household debt in India , as measured by credit card outstanding per card, has either been static or declined in recent times. With approximately 10.1 million credit cards in circulation as of January 2024, the average outstanding per card is around Rs 26,000, with rollovers and revolvers under control. This pales in comparison to the US, where the total outstanding credit card debt stands at $1.13 trillion for about 167 million cardholders, exacerbated by rising interest rates and defaults.

Finally, household sector financial savings increased to Rs 49.6 trillion in FY23 from Rs 38.4 trillion in FY20. Out of the Rs 49.6 trillion, the large jump in physical assets of Rs 12.3 trillion during FY23 more than offset the increase in financial liabilities at  around Rs 7.9 trillion. Additionally, out of the Rs 7.9 trillion increase, Rs 7 trillion (90 per cent) came from household borrowings from the banking system, mainly as retail credit that satiates basic needs. This puts to rest the constant nitpicking over the decline in net financial savings during this period.

We believe that total household savings (both financial and physical) for FY24 would still surpass FY23 levels despite the decline in financial savings. In sync, household debt-to-gross domestic product stood at 40.1 per cent as of December 2023, down from the highs of 42.2 per cent as of March 2021, according to the Bank for International Settlements. 

The fortification of the banking and financial system, buoyed by the tailwinds of higher capital adequacy ratios/ common equity tier 1 , improved liquidity coverage ratio /provision coverage ratio,  return on equity and return on assets aligning with industry standards, coupled with the lowest gross to net non-performing asset levels in a decade, better usage of alternate data (goods and services tax/ income tax) for credit underwriting and wherewithal to stand shocks as vouched by stress test models under both baseline and stressed scenarios, signify the resurgence of the “novel” approach to balanced tenets of banking. It is thus regrettable that coloured and unfounded criticisms, tinged with bias, have now become the norm rather than the exception.

The writer is group chief economic advisor, SBI, and member, 16th Finance Commission.  The views are personal