31-December-2024-Editorial

RBI’S TRENDS AND PROGRESS OF BANKING REPORT 2023-24

The Reserve Bank of India (RBI) recently released its Trends and Progress of Banking in India 2023-24 report, highlighting important developments, achievements, and risks in the Indian financial system. While the report acknowledges improvements in bank profitability and a reduction in bad loans, it raises concerns about increasing reliance on unsecured lending and emerging risks like employee attrition and dark patterns in financial practices.

Key Highlights of the Report

Decline in Non-Performing Assets (NPAs)

• GNPA Reduction: Gross non-performing assets (GNPAs) dropped to 2.7% in March 2024, the lowest in 13 years, and further declined to 2.5% by September 2024.
• Retail Loan Segment: This sector recorded the lowest GNPA ratio at 1.2% by September 2024.
• Agricultural Loans: Agriculture loans had the highest GNPA ratio at 6.2%, signaling the need for focused attention.
• Education Loans: GNPA levels in this segment significantly improved, falling from 5.8% in March 2023 to 2.7% by September 2024, though they remain among the highest in retail segments.

Bank Profitability

• Banks continued to achieve profitability, with the Return on Assets (RoA) reaching 1.4% in the first half of 2024-25.
• Return on Equity (RoE) stood at 14.6% in FY24, marking six years of sustained profit growth.
• Non-Banking Financial Companies (NBFCs) reported double-digit credit growth, enhanced asset quality, and strong Capital Adequacy Ratios (CRAR).
• Urban Co-operative Banks (UCBs) showed improved asset quality, profitability, and capital buffers.

Rise in Unsecured Lending

• The share of unsecured loans in Scheduled Commercial Banks’ (SCBs) total credit reached 25.5% in March 2023, marginally reducing to 25.3% by March 2024.
• Concerns over inadequate due diligence in approving top-up loans prompted stricter norms by the RBI in November 2024. This included increased risk weights and exposure limits.
• Loans secured against depreciating assets are now classified as unsecured loans to improve transparency.

Emergence of Dark Patterns

• Dark Patterns: These are unethical design practices in financial services that mislead consumers. Examples include hidden fees, fake countdowns, and complex cancellation procedures.
• The Central Consumer Protection Authority (CCPA) issued guidelines to regulate such practices, and the RBI is evaluating their prevalence among regulated entities.

Employee Attrition

• High employee attrition rates (25% over the past three years) are causing concerns about operational risks.
• Challenges include service disruptions, loss of institutional knowledge, and increased hiring costs.

Other Key Metrics

• The slippage ratio—which measures fresh NPAs—showed improvement in 2023-24. However, private banks recorded higher slippage ratios than public sector banks due to more fresh NPAs.

RBI’s Recommendations

For Employee Retention:

• Implement better onboarding processes, training, mentorship programs, and competitive benefits.
• Promote a supportive workplace culture to reduce attrition.

For Lending Practices:

• Strengthen compliance with credit appraisal processes.
• Ensure adherence to prudential guidelines, especially in the unsecured loan segment.

Key Financial Terms

• Return on Assets (RoA): Indicates a bank’s profitability compared to its total assets.
• Return on Equity (RoE): Measures how effectively a bank uses its shareholders’ equity to generate profit.
• Capital Adequacy Ratio (CRAR): Represents a bank’s ability to absorb losses, ensuring financial stability.
• Slippage Ratio: Reflects the proportion of loans turning into NPAs in a given period.
• Dark Patterns: Deceptive user interface designs that manipulate customer decisions.

Impact of Rising Unsecured Loans on India’s Economy

• Higher Default Rates: Increased issuance of unsecured loans could lead to more defaults, raising NPAs and causing financial stress on banks and NBFCs.
• Inflationary Pressures: Defaults reduce disposable income and discretionary spending, potentially leading to inflation and slower economic growth.
• Consumer Impact: While unsecured loans provide easy access to credit, they carry higher interest rates, potentially leading to debt traps.
• Rural and Urban Effects: Both rural and urban households face financial strain due to high-cost loans, affecting consumer confidence.

Way Forward

• Strengthening Lending Practices: Leverage technology like Artificial Intelligence (AI) to assess borrower risk and improve credit appraisal processes.
• Enhancing Consumer Protection: Educate borrowers on financial products and ensure transparency in lending practices. Strictly regulate dark patterns to safeguard consumer interests.
• Managing Inflation: Balance interest rates to control inflation while supporting economic growth.
• Strengthening Asset Quality: Monitor loan portfolios, increase capital buffers, and conduct regular stress tests to mitigate risks.
• Improving Regulatory Oversight: Ensure robust enforcement of prudent lending norms and conduct regular audits to maintain financial stability.

Conclusion

The RBI’s report provides a comprehensive overview of India’s banking sector, highlighting its achievements and emerging challenges. While declining NPAs and sustained profitability are positive signs, the rise of unsecured lending, dark patterns, and employee attrition demand urgent attention. Addressing these risks through tighter regulation, enhanced lending practices, and consumer protection will ensure the sector’s long-term resilience.