E-Paper
Banking data bodes well for the economy
Economic policy should continue pursuing this objective without frittering away the banking sector’s health improvement
The Reserve Bank of India (RBI)’s Report on Trend and Progress of Banking in India 2021-22, released on December 27, underlines the trend of continuous improvement in the health of India’s banking sector. Credit and deposit growth have improved, capital adequacy ratios are in healthy territory, and the share of non-performing assets continues to decrease. It is not a small feat that India has managed a (relatively) soft landing from its Twin Balance Sheet crisis. At a time when the global economy is experiencing strong headwinds and monetary tightening in advanced economies has increased volatility in emerging markets, this development becomes even more reassuring.
The credit goes to RBI’s nimble-footed approach during the pandemic’s disruption and its sustained efforts to clean bank balance sheets in India. To be sure, the story of India’s banking sector clean-up is not without disappointments. The biggest concern is the failure of the declining recovery rate — as, on September 30, the realisation was 33% of total claims — in the resolution of stressed assets through the Insolvency and Bankruptcy Code mechanism. While there is merit in the report’s observation that comparison of resolution proceeds to liquidation values is perhaps a better measure of the success or lack of it of this framework, it also increases the importance of better monitoring of stressed accounts. It is important to remember that a healthy financial sector is only a necessary condition, and not a sufficient condition, to boost sustainable growth. Economic policy should continue pursuing this objective without frittering away the banking sector’s health improvement.
