India's banking sector is well capitalized and bad loans in the system have declined, allowing lenders to support investments as the South Asian nation may outpace its peers in economic growth over the next three years.
The gross nonperforming loans ratio of India's scheduled commercial banks declined to 6.9% at the end of September 2021, from 7.5% a year prior, according to the government's Economic Survey presented in Parliament on Jan. 31. Banks' aggregate capital to risk-weighted asset ratio, or CRAR, rose to 16.54% from 15.84% over the same period, helped by an improvement at both state-owned banks and their private-sector peers, according to the report.
"A sturdy and cleaned-up banking sector stands ready to support private investment adequately. Expected increase in private consumption levels will propel capacity utilization, thereby fueling private investment activity," according to the report.
The government expects India's economy to grow 9.2% in the fiscal year that ends March 31, reversing a contraction of 7.3% recorded in the previous fiscal year. The nation's GDP is expected to expand between 8% and 8.5% in the next fiscal year that starts April 1, the report said, adding the government's projections were in line with those of the World Bank and the Asian Development Bank. That could make India the fastest-growing economy in the world over a three-year period.
Rising optimism
A survey by the Reserve Bank of India indicated rising optimism among investors and expansion in production in the coming quarters, according to the report.
The improvement in CRAR levels of state-owned banks was due to capital infusion by the government and their fundraising from the markets, while private sector lenders tapped capital from market sources, the government said. Based on their capital position as of Sept. 30, 2021, all banks maintained a capital conservation buffer of more than 2.5%, it said.
The return on assets and return on equity for state-owned banks turned positive in June 2020, after negative profitability ratios over the previous four years, it said. "The economic shock of the pandemic has been weathered well by the commercial banking system so far, even if some lagged impact is still in pipeline."
The government said the current fiscal year has been "exceptional" for the nation's capital markets, with more than 890 billion rupees raised via 75 IPOs from April to November 2021, the highest in any year of the last decade. These included the $2.47 billion raised by One97 Communications Ltd. in India's biggest IPO ever.
Credit growth of the shadow banking sector, however, has stayed sluggish. Total credit of non-banking financial services companies increased marginally to 28.03 trillion rupees in September 2021, from 27.53 trillion rupees in March 2021, according to the report.
As of Jan. 28, US$1 was equivalent to 75.01 Indian rupees.
