The Reserve Bank of India (RBI) in its latest report raised alarms about emerging risks in the financial ecosystem, particularly related to unsecured lending and private credit.
GNPAs (Gross Non-Performing Assets) reached a 13-year low of 2.7% by March 2024, further improving to 2.5% by September 2024.
Retail loans had the lowest GNPA ratio at 1.2% in September 2024.
Agriculture loans faced the highest GNPA ratio at 6.2%.
Education loans showed significant improvement, declining from 5.8% in March 2023 to 2.7% by September 2024, though they remained the highest among retail segments.
Banks' profitability showed sustained growth:
Return on Assets (RoA) stood at 1.4% for the first half of FY24-25.
Return on Equity (RoE) reached 14.6% for FY24.
This marks six consecutive years of profit growth for banks.
The NBFC sector showed double-digit credit growth, along with improved asset quality and strong Capital Adequacy Ratios (CRAR).
The Scheduled Commercial Banks (SCBs) saw strong growth in both credit and deposits.
Urban Co-operative Banks (UCBs) exhibited improvements in asset quality, capital buffers, and profitability.
The share of unsecured loans in SCBs' total credit increased to 25.5% in March 2023, before slightly declining to 25.3% in March 2024.
In response, the RBI introduced stricter norms in November 2024, including:
Raising risk weights on unsecured loans.
Setting exposure limits (maximum lending to a borrower/group).
Concerns were raised about the misuse of top-up loans, which were often approved with minimal due diligence and lax adherence to guidelines. Some reports highlighted that such loans were being redirected to the stock market.
The RBI also mandated that top-up loans against depreciating movable assets be treated as unsecured loans.
The RBI highlighted concerns over dark patterns in the financial sector. These are deceptive practices in user interfaces that manipulate consumers into actions they did not intend.
The Central Consumer Protection Authority (CCPA) issued guidelines to regulate these practices.
The RBI is also evaluating the prevalence of such patterns among regulated entities (REs).
Employee attrition rates have surged to 25% over the past three years, raising concerns about:
Operational risks like service disruption and loss of institutional knowledge.
Higher recruitment costs.
The RBI recommended that banks adopt strategies such as:
Improved onboarding, training, and mentorship.
Offering competitive benefits.
Fostering a supportive workplace culture to curb attrition.
The slippage ratio improved in 2023-24, with private sector banks (PVBs) having a higher slippage ratio than public sector banks (PSBs) for the third consecutive year.
The higher slippage in PVBs was due to larger fresh accretions to NPAs in these banks.
Improved compliance with credit appraisal processes and prudential guidelines, especially regarding unsecured loans.
Strategies to address employee attrition and its operational impact.
Enhanced vigilance over emerging risks in the financial ecosystem.
As the share of unsecured loans rises, the risk of defaults increases, leading to higher NPAs and creating financial strain on banks and NBFCs.
This could lead to financial instability and increased systemic risk.
Rising defaults and higher interest rates associated with unsecured loans can reduce disposable income for consumers.
This could contribute to lower consumer spending, increasing inflation and slowing economic growth.
Unsecured loans provide easier access to credit, benefiting consumers in the short term.
However, the high interest rates could lead to debt traps for consumers who cannot repay their loans on time.
Both rural and urban consumers face financial instability due to the high cost of loans, contributing to lower consumer confidence and economic uncertainty.
Credit appraisal processes need to be strengthened, using technology and AI to better assess borrower risk and reduce defaults.
There should be a focus on financial literacy, transparency in loan products, and strict regulation of dark patterns in lending.
Authorities need to balance interest rates with the need for economic growth, ensuring that interest rate hikes do not disproportionately reduce disposable income.
Banks should proactively monitor loan portfolios, build stronger capital buffers, and conduct stress testing to ensure financial stability.
Rigorous enforcement of prudent lending practices and regular audits will be critical to maintain stability in the banking sector and safeguard public trust.
Return on Assets (RoA): A measure of a company's profitability relative to its total assets, indicating how efficiently assets are used to generate profit.
Return on Equity (RoE): A measure of profitability relative to shareholders' equity, indicating how well the bank is generating returns for its investors.
Capital Adequacy Ratios (CRAR): A measure of a bank’s financial strength, indicating its ability to absorb losses while protecting depositors and maintaining financial stability.
Slippage Ratio: The ratio of new NPAs (bad loans) to the standard advances (loans that are not classified as bad) at the beginning of the year.
Dark Patterns: Deceptive practices used in user interfaces or experiences that manipulate users into actions they didn't intend, such as hidden costs or misleading options, often aimed at maximizing profits at the user's expense.
About RBI
The Reserve Bank of India (RBI) is India's central banking institution, which controls the monetary policy of the Indian rupee and is responsible for regulating the country's financial system. Established in 1935, the RBI plays a crucial role in maintaining financial stability, ensuring the smooth functioning of financial markets, and fostering economic growth in India.
Monetary Policy: The RBI formulates and implements India's monetary policy to manage inflation, promote economic growth, and stabilize the currency. This is done through tools like repo rate, reverse repo rate, and cash reserve ratio (CRR).
Inflation Targeting: The RBI works with the Government of India to maintain price stability, aiming for an inflation target set by the government (usually around 4%).
Money Supply: The RBI regulates the money supply to ensure that there is neither excessive liquidity (which can cause inflation) nor too little (which can slow economic growth).
The RBI is the sole issuer of currency notes in India (except one-rupee coins and notes, which are issued by the Government of India). It ensures there is enough currency in circulation and manages the supply of money.
It is responsible for designing, distributing, and managing the currency in a way that prevents counterfeit currency and ensures trust in the monetary system.
Banking Supervision: The RBI supervises and regulates commercial banks, regional rural banks, cooperative banks, and non-banking financial companies (NBFCs) to ensure their financial health and stability.
It lays down norms for capital adequacy, risk management, and loan recovery.
It also governs the foreign exchange market and facilitates efficient functioning in the forex market by maintaining foreign exchange reserves.
The RBI manages the foreign exchange reserves of India, ensuring that the country has enough reserves to pay for its imports and maintain stability in the rupee's value.
It is responsible for the Foreign Exchange Management Act (FEMA) and acts as a regulator for cross-border capital flows.
The RBI ensures the security and efficiency of the payment systems in India. This includes overseeing various digital payment methods, Real-Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT), Immediate Payment Service (IMPS), and other payment systems.
The RBI works towards financial inclusion and aims to ensure that all sectors of society can access and benefit from formal financial services.
The RBI has played a key role in the financial inclusion initiative, ensuring access to banking services for the underprivileged, rural areas, and unbanked regions.
It facilitates the development of financial markets by fostering a robust financial infrastructure, including the bond market, currency market, and capital market.
The RBI regulates and supervises NBFCs, ensuring they adhere to norms that safeguard the interests of depositors and customers.
NBFCs are significant players in sectors like microfinance, housing finance, and vehicle loans, and their growth is closely monitored by the RBI.
The RBI acts as the banker to the Government of India and state governments, managing the public debt and helping in the management of government accounts.
It is involved in the issuance of government bonds and manages the accounts of the central and state governments.
Monetary Policy Department (MPD): Responsible for formulating and implementing the country's monetary policy, controlling inflation, and stabilizing the economy.
Financial Markets Department (FMD): Manages the foreign exchange market, government securities, and bond markets.
Department of Regulation (DoR): Oversees the regulatory framework for financial institutions, including commercial banks and NBFCs.
Department of Payments and Settlement Systems (DPSS): Regulates the payment and settlement systems across the country.
Department of Currency Management: Manages currency issuance and ensures a smooth flow of currency in the economy.
Department of External Investments and Operations (DEIO): Manages foreign exchange reserves and oversees India's external financial operations.
Trends and Progress of Banking in India Report (2023-24):
In the 2023-24 report, the RBI highlighted the rise in unsecured loans, increased employee attrition, and concerns about dark patterns in digital lending.
It also noted the decline in non-performing assets (NPAs), indicating an improving banking environment, but raised alarms about the emerging risks tied to unsecured lending and top-up loans.
Monetary Policy and Interest Rates:
The RBI's Monetary Policy Committee (MPC) regularly meets to set key rates, such as the repo rate (the rate at which banks borrow from the RBI) and the reverse repo rate (the rate at which the RBI borrows from banks).
These rates influence lending rates, inflation, and overall economic activity.
Digital and Financial Inclusion Initiatives:
The RBI has taken steps towards enhancing digital banking, including the introduction of Central Bank Digital Currency (CBDC) in India, also known as the digital rupee.
It has also emphasized financial literacy, aiming to increase awareness about banking services, digital payments, and financial planning.
Unsecured Loans:
As per recent RBI reports, there has been growing concern about the rise of unsecured loans, particularly in the retail segment. While these loans offer consumers easier access to credit, they also pose risks of defaults and financial instability.
Regulation of Digital Lending:
The RBI has expressed concerns about the potential for misleading practices in digital lending platforms, often involving unethical design tactics (dark patterns) that mislead consumers.
Financial Inclusion:
One of the RBI's key priorities remains increasing financial inclusion, particularly in underserved rural areas and among the unbanked population.
Maintaining Financial Stability:
The RBI is focused on ensuring that the banking system remains resilient, especially amidst global economic uncertainties, rising inflationary pressures, and the evolving digital economy.
The RBI's Trends and Progress of Banking in India 2023-24 report sheds light on key issues facing the banking sector, including unsecured loans, NPAs, employee attrition, and dark patterns. It stresses the importance of vigilance, especially with rising risks associated with unsecured lending and financial practices. The RBI's recommendations point to the need for stronger regulation, better compliance, and improved consumer protection measures to ensure the long-term stability of the financial system while protecting consumers from excessive financial stress.
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In every Lecture. Director Sir will provide conceptual understanding with around 800 Mindmaps.
We provide you the best and Comprehensive content which comes directly or indirectly in UPSC Exam.
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