Indian banking’s looking up but caution is warranted

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₹1 trillion, three times of the figure nine years ago. Dividends paid to the government, their major shareholder, have been handsome. The finance minister justifiably rattled off a list of impressive statistics recently on the sector’s health.

The gross non-performing assets (NPAs) of all scheduled commercial banks are down from 11.5% five years ago to a decadal low of 3.9%. This is expected to fall further to 3.6% by next March. Net interest margin is very high at 3.3%.

The case of state-owned Bank of Maharashtra (BOM) is both illustrative and impressive. BOM was under the Prompt Corrective Action (PCA) framework of the Reserve Bank of India (RBI) five years ago. Its NPAs were 11.8%, return on assets a negative 1%, and it reported a loss of ₹1,372 crore in 2016-17.

That same BOM has topped the league of all banks on several metrics and has been topping the charts for three years in a row. Its net NPAs in March 2023 were 0.25%, even as its provision coverage ratio (for bad loans) was an amazing 98.3% and capital adequacy ratio 18.1%. Has it been too risk averse? Not at all.

Profit growth from business was an outstanding 126% over the previous year, contributing ₹2,602 crore to its bottom line. Its loan growth was close to 30%, possibly the highest among large banks. This performance was matched by many other PSBs, so overall the previous fiscal year that ended this March has been one of the best years in the past five decades of bank nationalization.

RBI put out a statement in February to assert that our banking sector remains resilient and stable. This report was in response to media reports expressing concern about bank health and especially exposure to large corporates. While we celebrate the banking sector’s success