Indian banking poised for growth, emphasises need for enhanced risk management: RBI

The RBI report cautions against contagion risk due to deep interconnections between banks and non-banks, urging continuous evaluation of exposures [View in browser]( [See all newsletters]( 28 December 2023 Indian banking poised for growth, emphasises need for enhanced risk management: RBI [The central bank underscored that high capital ratios, improved asset quality, and robust earnings growth are the reasons for banks and NBFCs being sound and resilient] The Reserve Bank of India (RBI) said the Indian banking system and non-banking financial companies (NBFCs) remain sound and resilient, even as it cautioned that the high level of interconnectedness between them merits close attention. The central bank underscored that high capital ratios, improved asset quality, and robust earnings growth are the reasons for banks and NBFCs being sound and resilient. This is supporting double-digit credit growth and domestic economic activity, per the RBI’s report on “Trend and Progress of Banking in India 2022–23.” - Read:[Indian banks outperform global peers on key financial parameters: McKinsey report]( However, sustaining this improvement requires further strengthening of governance and risk management practices and the building up of additional buffers. The report assessed that the Indian banking system is well positioned to improve further, with better asset quality, high capital adequacy, and robust profitability. - Read:[Economy remains resilient, banking system fortified by low level of NPAs: RBI]( The financial indicators of NBFCs are also set to strengthen further, underpinned by adequate capital, increased provisions, and improved asset quality. Financial stability is being underpinned by corporates’ stronger financials and the deleveraging of their balance sheets, the report said. Contagion risk The RBI said that given the strategic importance of NBFCs in the financial system, the high level of interconnectedness between banks and non-banks merits close attention. “NBFCs are large net borrowers of funds from the financial system, with the highest exposure to banks. Several NBFCs maintain borrowing relationships with multiple banks simultaneously. “Banks are also key subscribers to their debentures and commercial papers. Such concentrated linkages may create contagion risk,” the central bank cautioned. - New study. [Banking mergers in India have been beneficial to the banking sector: RBI paper]( Although banks are well-capitalised, they need to constantly evaluate their exposure to NBFCs as well as the exposure of individual NBFCs to multiple banks, per the central bank’s advice. NBFCs, on their part, should focus on broad-basing their funding sources and reduce over-dependence on bank funding. Even as consumer credit, especially the unsecured portfolio, accelerated substantially post-Covid and the increasing dependency of NBFCs on bank borrowings caused regulatory concerns, the RBI noted that the asset quality of the unsecured retail loans has not shown any deterioration so far. - Read: [Expanding the contours of banking sector]( Although their asset quality did not exhibit any major signs of stress, the consistent high credit growth in bank loans to NBFCs and commercial banks’ and NBFCs’ exposure to consumer credit and credit card receivables warranted a prudential intervention, the central bank said. It emphasised that the calibrated and targeted macroprudential measures (increase in the risk weights) announced in November 2023 with respect to select categories of consumer credit loans and bank lending to NBFCs are pre-emptive in nature and in the interest of financial stability. Customer Service The RBI observed that the efforts of banks to provide timely solutions to customer grievances have not kept pace with the explosion in technology and products. The central bank emphasised that bank boards and top executives need to focus on the quality of grievance redressal instead of just monitoring turnaround time (TAT) and management information systems (MIS) on complaints. “REs (regulated entities) need to bring greater empathy into their services, products, and operations. “There is a need for greater effort to provide safe and friendly tech-banking to senior citizens, people with special needs, and those who are technologically challenged,” the report said. Banks must ensure that their access points — branches, websites, and apps — are user-friendly and convenient for customers with special needs. The RBI warned that systemic risks may arise when various regulated entities rely on a small number of third parties to provide services. In order to assess the concentration risk, the central bank said a comprehensive exercise was undertaken to map the IT service providers with scheduled commercial banks. Based on this exercise, joint audits of IT service providers by banks are being proposed under the aegis of the Indian Banks’ Association (IBA). These audits will ensure a comprehensive and standardised evaluation of the vendors. Based on this exercise, joint audits of IT service providers by banks are being proposed under the aegis of the Indian Banks’ Association (IBA). These audits will ensure a comprehensive and standardised evaluation of the vendors. 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