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The <keyword id="19899810" type="General" weightage="20" keywordseo="Reserve-Bank-of-India" source="keywords" meta.keywordsubtype="org" meta.entityname="Reserve Bank of India" meta.hostid="261" meta.entityid="Reserve Bank of India">Reserve Bank of India</keyword> announced the decision of the newly formed six-member MPC (<keyword id="19913109" type="General" weightage="20" keywordseo="Monetary-Policy-Committee" source="keywords">Monetary Policy Committee</keyword>) today, following the conclusion of the three-day meeting, which began on October 7, 2024. Treading along expected lines, RBI rate-setting panel left the repo rate unchanged at 6.5% for the 10th consecutive time, in its 51st meeting today. The decision was made by a majority, with 5 out of 6 members voting for leaving the rate unchanged. This is the fourth bi-monthly monetary policy review for FY25, and the first since three external members were appointed to the panel earlier this month. The tenure of the previous three members had come to an end on October 4, 2024. While the outgoing members include Ashima Goyal (emeritus professor, Indira Gandhi Institute of Development Research), Shashanka Bhide (honorary senior advisor, National Council of Applied Economic Research); and Jayanth R. Varma(professor, Indian Institute of Management, Ahmedabad), the income members are Ram Singh (Director, Delhi School of Economics), Saugata Bhattacharya, an economist; and Nagesh Kumar (Director and chief executive, Institute for Studies in Industrial Development). <h2>Wait and Watch </h2>RBI also changed its policy stance to neutral, while remaining committed to growth and bringing down inflation to its target of 4%. This means that at present, the bank is not inclined to either increase or decrease the interest rates, but will take a call depending on macroeconomic conditions and prevailing factors. "Taking all these factors into consideration, the real GDP growth for 2024-25 is projected at 7.2%, with Q2 at 7%, Q3 at 7.4% and Q4 at 7.4%", he said. As for inflation, Das highlighted that headline inflation had softened significantly in July and August and even food inflation experienced a certain degree of correction during these two months. Keeping this in mind, CPI inflation for 2024-25 i.e. current year is projected at 4.5%, with Q2 at 4.1%, Q3 at 4.8% and Q4 at 4.2%. CPI for first quarter of next financial year i.e. 2025-26 is estimated at 4.3%. "It's with a lot of effort that inflation horse has been brought to the stable, i.e. closer to the target and within the tolerance span, compared to its place or heightened levels two years ago. We have to be very careful about opening the gate, as the horse may simply hold again. We must keep the horse in tight leash, so that we do not lose control", Das added. Most economists had anticipated a change in the central bank's current policy stance of 'withdrawal of accommodation'. This policy stand indicates that any interest rate cuts are presently off the table. However, given the ongoing geopolitical crisis and Fed's jumbo rate cut by 50-basis points last month, RBI may bring about a cut in interest rates, sooner than later. However, since food inflation remains high at 5.42% as of July 2024, experts had also estimated that now might not have been a good time for RBI to bring down interest rates. Moreover, PMI (purchase managers index) indices, which help in gauging the health of manufacturing and service sectors in the country, presently stand at a multi-month low, and even the core sector output is witnessing a contraction after 42 straight months. As Suman Chowdhury, Executive Director &amp; Chief Economist, Acuité Ratings &amp; Research had highlighted, the current circumstances are not really conducive for RBI to opt for any affirmation action towards an easier monetary policy. "While the fear of the inflation “elephant” may have subsided with the CPI headline print well within 4.0% over the last two months and a favorable monsoon, the concerns around the stability of food inflation still linger among policy makers. The RBI may wait till December 2024 or February 2025 to make a rat cut, he continued. <h2>Housing sector rejoices</h2>From the point of view of homebuyers, the relatively affordable home loan interest rate regime will continue at a critical time for the Indian housing market - the festive season - amid rising housing prices and tapered sales. Q3 2024 saw average housing prices rise by a cumulative 23% in the top 7 cities even as average prices in these markets collectively rose to approximately Rs 8,390 per sq. ft. by Q3 2024-end, from Rs 6,800 per sq. ft. in Q3 2023. "The unchanged home loan rates are much-needed demand support in the ongoing festive quarter. We are expecting faster sales momentum in Q4 2024 when compared to the preceding quarter. This year's festive quarter may see similar demand to that seen in this period a year ago, if not higher. Over 1.27 lakh units were sold across the top 7 cities back in Q4 2023. Unchanged interest rates will play and important role in achieving and maintaining this momentum", says Anuj Puri, Chairman - ANAROCK Group

RBIs MPC meet concludes today: Repo rate left unchanged at 6.5%

Amid questions on the depleting <keyword id="20776807" type="General" weightage="100" keywordseo="loan-to-deposit-ratio" source="keywords">loan-to-deposit ratio</keyword> in <keyword id="19895091" type="General" weightage="20" keywordseo="Indian-banks" source="keywords">Indian banks</keyword>, a recent report by <keyword id="19896146" type="General" weightage="20" keywordseo="Motilal-Oswal" source="keywords" meta.keywordsubtype="org" meta.entityname="Motilal Oswal" meta.hostid="269" meta.entityid="Motilal Oswal">Motilal Oswal</keyword> suggests that the loan-to-deposit (LD) ratio is likely to subside on its own in the coming months. The debate on loan-to-deposit ratio (LD), particularly concerning sluggish <keyword id="19998084" type="General" weightage="20" keywordseo="deposit-growth" source="keywords">deposit growth</keyword> and potential risks to <keyword id="20089808" type="General" weightage="20" keywordseo="financial-stability" source="keywords">financial stability</keyword> is raised by even the finance minister and the <keyword id="20151998" type="General" weightage="20" keywordseo="RBI-governor" source="keywords">RBI governor</keyword>. However, the report notes that on closer examination, the situation may not be as alarming as it seems. As of 9th August, 2024 the Indian <keyword id="19964544" type="General" weightage="20" keywordseo="banking-sector" source="keywords">banking sector</keyword>'s loan-to-deposit (LD) ratio stood at 77.2 %, which is slightly below its recent peak of 78.2 % on 22nd March 2024, and its all-time high of 78.8 % in September 2013. The report stated that typically a rising LD ratio is indicative of a tightness in the banking sector, potentially indicating overheating. A lower LD indicates that the bank is aggressive in its credit disbursement practises, which could be risky. It highlighted that an analysis of the sector's transactions with the Reserve Bank of India (RBI) through the liquidity adjustment facility (LAF), along with recent trends in the weighted average call rate (WACR), suggests that the current rise in the LD ratio does not indicate tightness, which is why there is no immediate cause of concern. In fact, the report added that the concern over weak deposit growth may be overstated. Historical data show that bank deposits grew at an average rate of 9.5 % during the pre-COVID period (January 2015 to February 2020) and 10.4 % in the post-COVID period (March 2020 to August 2024). Earlier, Finance Minister Nirmala Sitharaman also urged state-run banks to enhance deposit mobilization through attractive offers and focusing on Tier-2 and Tier-3 cities. Loan-to-deposit ratio pegs the total deposits received by the bank against the loans it has offered. It helps in understanding how liquid the bank is. The loan-to-deposit ratio (LDR) is a financial metric that compares a bank's total loans to its total deposits. It's used to assess a bank's liquidity and credit risk, and to inform lending and deposit-taking decisions The report said while the exact measures are unclear, the deposit growth could potentially be increased by making other asset classes less attractive through taxation or interest rates, or by boosting fiscal spending to increase net credit to the government. In its forecast, the report noted that private banks will witness a moderation in their <keyword id="19998083" type="General" weightage="20" keywordseo="credit-growth" source="keywords">credit growth</keyword>, while public sector banks will maintain a healthy credit growth rate. "Our analysis suggests that deposit growth could be raised by either making other asset classes unattractive (through taxation and/or interest rate) or increasing the growth in net credit to the government by pushing fiscal spending higher" the report added. Alternatively, policymakers might consider curtailing loan growth to lower the LD ratio. However, this could slow deposit growth, particularly if corporate credit growth remains weak. Encouraging savers to shift investments from other assets to bank deposits could also be an option, but this carries risks of overreach and potential damage to economic confidence. Das had also flagged the excessive growth, or froth developing in the personal loan space. Notably, while credit growth in unsecured personal loans like credit cards continues to decline, it remains elevated at 23.3% as of June 2024. However, this is a significant reduction from 34.2% witnessed in November 2023. As fiscal spending increases, bank credit to the government is likely to grow, which should elevate deposits and broad money supply. The report said "However, the extent of foreign capital inflows and the RBI's policy for managing these inflows remain uncertain". Last month, RBI governor Shaktikanta Das had also addressed this issue in the 50th meeting of MPC (Monetary Policy Committee). Per him, deposit mobilisation has been lagging credit growth for some time now. This may potentially expose the system to structural liquidity issues. "While there could be a debate regarding ‘deposits funding loans’ vis-à-vis ‘loans funding deposits’, the current regulatory concern stems from the fact that there could be structural changes happening which banks need to recognise and, accordingly, devise their strategies. Households and consumers who traditionally leaned on banks for parking or investing their savings are increasingly turning to capital markets and other financial intermediaries", Das said. Per him, while bank deposits continue to remain dominant as a percentage of financial assets owned by households, their share has been declining consistently, since households are now increasingly allocating their savings to mutual funds, insurance funds, pension funds and other avenues.

Loan-to-deposit ratio will subside on its own in coming months, notes Motilal Oswal report

Imagine this. You have a younger sibling you’re mighty envious of. And why not? Unlike you, they seem to enjoy all the freedom and money in the world. They party like there’s no tomorrow, and here you are, stuck in a boring, ultra-disciplined but responsible routine that feels completely devoid of any independence, and mostly, funds. But of late, things are changing. This sibling is in massive trouble and just cannot escape the parent’s wrath anymore. Long story short, the party is over, and it is time to go back home. The rising defaults on this sibling’s part have now begun pulling the entire house down, thereby attracting the regulator’s ire. <h2>The Wild West of microfinance and unsecured loans</h2>It's hard to ignore the issues with microfinance and unsecured loans in India. Many saw them as a small gamble and ignored the rising defaults much like the younger siblings’ tantrums, and now they find themselves in hot waters. The skyrocketing instances of non-payments aren't a micro-issue anymore and are threatening the stability of the entire banking system. In the quarter ended September 30, 2024, 5 of India’s 8 largest private sector <keyword id="19934118" type="General" weightage="20" keywordseo="banks" source="keywords">banks</keyword> reported a steep rise in their bad loan book, mostly thanks to microfinance loans. Some banks, in a bid to strengthen their fortress against these <keyword id="142154" type="General" weightage="100" keywordseo="bad-loans" source="Orion">bad loans</keyword>, have significantly upped their provisions. For instance, <keyword id="46717" type="General" weightage="20" keywordseo="IndusInd-bank" source="Orion">IndusInd Bank</keyword> set aside Rs 525 crore during July and September 2024 to battle the menace of defaults on microfinance loans, which make up about 9% of its total loan book. See, banks rely heavily on their interest income, which they earn from advancing loans. Any loan where the borrower has not paid interest to the bank or defaulted for 90 days or more becomes bad, i.e., an <keyword id="79363" type="General" weightage="20" keywordseo="npa" source="Orion">NPA</keyword>, or non-performing asset for the bank. And who likes things going bad? Simply put, there has been a steep rise in three areas, much to the dislike of banks and MFIs (micro-finance institutions). But hey, it's mostly their doing! <ol><li>GNPA ratio (gross net performing assets): The quantum of non-performing assets a bank has in proportion to its total assets.</li><li>Provision: The amount banks set aside to take care of such NPAs.</li><li>Slippage ratio: The rate at which good girls go bad, or the speed at which good loans turn into NPAs</li></ol>But how are these plaguing the Indian banking sector? And what does the road ahead look like? We decode it for you. <h2> Microfinance: A not-so-micro-menace</h2>Microfinance loans were initially brought forth for low-income households and individuals, i.e. for those who might not generally have access to traditional ways of credit, like bank loans and more. They don’t require collateral or an asset to be pledged in lieu of the loan, making it a tad bit easier for borrowers. As of June 2024, the amount of outstanding loans in the microfinance industry stood at a staggering Rs 4,20,256 crore. Of this, NBFC-MFIs accounted for 40% and banks made for 33% of these. In 2022, <keyword id="30067" type="General" weightage="20" keywordseo="RBI" source="Orion">RBI</keyword>, in a bid to inspire some competition in this space, did something radical-they did away with the ceiling on how much interest MFIs could charge their customers. Previously, MFIs could add up to 12% to their cost of acquiring funds to determine the final interest rate chargeable to the consumer. So, assuming that Bank A incurs a 5% cost to acquire funds for further loaning, A could charge up to 17% interest from the end consumer. So, interest rates were in the hands of MFIs, and boy, did they have a gala time with it. Instead of spurring some healthy competition, as RBI expected, MFIs and banks went rogue and all guns blazing, competing for the title of “Who will charge the highest interest?” Recently, RBI banned 4 microfinance institutions (MFIs), namely Asirvad Micro Finance Limited, Arohan Financial Services Limited, DMI Finance Private Limited, and Navi Finserv, from disbursing loans effective October 21, 2024. Why? Because they were charging 14% extra interest over their original cost of funds. To maintain their loan books (and pockets), banks and NBFCs resorted to shady practices like netting off loans, which RBI has now advised MFIs against. Here, lenders allow borrowers to settle a previous outstanding loan by issuing them a new loan! As crazy as it sounds, it helped banks to report less of their total assets as NPAs, since the new credit would cover pending installments of the borrower’s previous loan. Then there was the issue of borrowers overleveraging, i.e. taking multiple loans using different IDs from various lenders and then failing to honor any of them. The consequence? Banks and NBFCs end up with massive NPAs. Data from credit bureaus suggests that over the last quarter, there was a 17.2% rise in the number of borrowers who had 5 or more active loans at the same time. <h2>Growth &gt; Caution</h2>It's an age-old tale unfolding yet again in India’s banking sector- Icarus flew too close to the sun and eventually, fell to its death. Between April and June 2024, NBFCs microfinance portfolio jumped by 2.7%. If you see this in terms of loan sources, microfinance loans issued by banks grew by 11.2% in Q1FY25. But the same portfolio in NBFCs swelled by almost double-23.9%. While most of these loans had an average ticket size between Rs 30,000-50,000, there was a sharp spike in the number of loans that had a ticket size of Rs 80,000 or more. Data suggests that as of March 2024, more than 12% of all microfinance borrowers had over 4 or more active loans. In dating parlance, this is a classic case of borrowers going polyamorous, minus the honesty and transparency. Not the best of situations, you'd agree! <h2>Will banks and NBFCs stand up to this stress?</h2>If their results for Q2FY25 are to be believed, NBFCs are not handling the pressure all that well. Or even slightly well. Only a few banks like Bank of Baroda (BoB), ICICI, and Indian Bank were up for the battle, even witnessing a decline in their loan delinquencies. Some others, like IndusInd Bank, saw their stock dip by a massive 16.2% over the last 5 days. Its slippages in the previous quarter burgeoned from Rs 15.3 billion in Q1FY25 to Rs 17.9 billion in Q2. As a result, the bank pushed a staggeringly high amount of money to create an NPA cushion for itself. While its management has highlighted its preference for secured lending, that was hardly reflected in its actions during the quarter, where growth in unsecured personal loans remained exceptionally high at over 7% on a QoQ basis. Turns out, only 44% of customers in IndusInd Banks’ microfinance loan portfolio were exclusive to it. The rest 47% were, you guessed it right-polyamorous! 27% had borrowed from another lender as well, apart from IndusInd Bank, while 20% were those who had outstanding loans with two other lenders, apart from IndusInd Bank. IndusInd Bank’s credit card segment did not miss the NPA bus and accounted for 7-8% of its GNPAs. Canara Bank’s total slippages during the previous quarter jumped to Rs 11.1 billion, up by 24.7% QoQ, and making up for 3.6% of its total loans. As for Bandhan Bank, its <keyword id="763994" type="General" weightage="20" keywordseo="Gross-NPA" source="Orion">gross NPA</keyword> for Q2FY25 inched up on a QoQ basis, up from 4.23% in Q1, to 4.68% in the second quarter. <keyword id="62152" type="General" weightage="20" keywordseo="IDFC-bank" source="Orion">IDFC Bank</keyword>’s heavy provisioning for its NPAs marred its profits significantly, causing its PAT (profit after tax) to dip by 73% on a YoY basis. Data from ICRA Analytics suggest that the AUM (asset under management) growth in microfinance loans and unsecured (personal and business) loans by the NBFCs will moderate to 10-12% and 19-21%, respectively, in FY2025 compared to 30% and 38%, in FY2024. Says A M Karthik, Senior Vice President &amp; Co-Group Head, Financial Sector Ratings, ICRA, “As bank funds constitute a larger share in the overall funding of NBFCs, a slower credit flow from banks to the NBFCs will compress their AUM growth. The NBFCs in unsecured and digital lending businesses shall face a higher squeeze in funding compared to others, and the unsecured lending space will continue to be a source of stress in the near term.” There has been uninhibited growth in unsecured loans, apart from just the microfinance segment. For instance, Axis Bank’s gross slippages jumped by Rs 4,443 crore, largely thanks to its unsecured business. The same is the case with Yes Bank, which saw 35–40% of its retail slippages emerging from the unsecured loan portfolio. Kotak Mahindra Bank was also quick to follow Yes Bank’s suit, with around 35%-40% of its slippages coming from credit cards. <h2>How is the road ahead?</h2>While RBI has just cracked its whip and served a warning at the moment, experts at Morgan Stanley believe that more changes (read regulatory lashes) are underway. Moreover, with both festive and wedding seasons underway in our country, unsecured lending might pick up momentum, much to the disdain of the calibrated approach banks have been taking towards it so far. But if the situation doesn't improve, RBI will not waste any time in becoming the typical tyrannical Bollywood headmaster who runs his dominion with an iron fist and takes things (and ceiling rates) into their own hands. However, that's a story for another day.

Is the lending party over? The dangerous tango of Indian banks with microfinance and unsecured loans

The <keyword id="6354335" type="General" weightage="20" keywordseo="reserve-bank-of-india" source="Orion">Reserve Bank of India</keyword> (RBI) has imposed <keyword id="512003" type="General" weightage="20" keywordseo="penalties" source="Orion">penalties</keyword> to the tune of Rs 40.39 crore on banks, non-banking financial companies (NBFCs) and other entities for breach of norms during 2022-23, Minister of State for Finance Bhagwat Karad said in a written reply to the Lok Sabha on Monday. As many as 176 of these cases involving fines of Rs 14.04 crore pertained to <keyword id="6554737" type="General" weightage="20" keywordseo="cooperative-banks" source="Orion">cooperative banks</keyword>. <keyword id="141219" type="General" weightage="20" keywordseo="private-sector-banks" source="Orion">Private sector banks</keyword> were fined Rs 12.17 crore while public sector banks (PSBs) were levied penalties of Rs 3.65 crore, foreign banks Rs 4.65 crore, and NBFCs ended paying up Rs 4.39 crore. "RBI has informed that it is mandated to take enforcement action as per Enforcement Policy and Framework approved by the Board for Financial Supervision of RBI, in the form of imposition of monetary penalty on regulated entities for contraventions of different statutes and directions," the Minister stated. The RBI issued guidelines on fair practices code to be adopted by banks, NBFCs, and HFCs and these covered various aspects of lending, he added.

RBI penalties on banks, NBFCs add up to Rs 40.39 crore for 2022-23

<keyword id="19922074" type="General" weightage="20" keywordseo="Reserve-Bank" source="keywords" meta.keywordsubtype="org" meta.entityname="Reserve Bank" meta.hostid="261" meta.entityid="Reserve Bank">Reserve Bank</keyword> Deputy Governor <keyword id="19918795" type="General" weightage="20" keywordseo="Swaminathan" source="keywords">Swaminathan</keyword> J on Wednesday said implementation of <keyword id="22784242" type="General" weightage="100" keywordseo="risk-based-premium" source="keywords">risk-based premium</keyword> for <keyword id="20132734" type="General" weightage="20" keywordseo="deposit-insurance" source="keywords">deposit insurance</keyword> merits consideration as it will ensure that institutions with higher risk profiles contribute more to the insurance fund. Speaking at a conference in Jaipur, he also said that as the financial sector becomes more digitised, deposit insurers must work closely with regulators and supervisors to strengthen oversight mechanisms. This includes regularly updating <keyword id="19946068" type="General" weightage="20" keywordseo="regulatory-frameworks" source="keywords">regulatory frameworks</keyword> to incorporate emerging risks associated with <keyword id="19989657" type="General" weightage="20" keywordseo="digital-payments" source="keywords">digital payments</keyword>, <keyword id="19906883" type="General" weightage="20" keywordseo="cybersecurity" source="keywords">cybersecurity</keyword>, and <keyword id="22180855" type="General" weightage="20" keywordseo="fintech-innovations" source="keywords">fintech innovations</keyword>. By adopting a proactive stance, deposit insurers can help ensure that <keyword id="19912054" type="General" weightage="20" keywordseo="financial-institutions" source="keywords">financial institutions</keyword> under their purview are adequately prepared to manage these risks, thereby safeguarding depositor confidence. Swaminathan was addressing the International Conference of the International Association of Deposit Insurers- Asia Pacific Regional Committee (IADI-APRC) hosted by the Deposit Insurance Credit Guarantee Corporation (DICGC). He further said the implementation of risk-based premium for deposit insurance "merits consideration". "By tying insurance premiums to the level of risk posed by individual financial institutions, deposit insurers can incentivize banks to adopt stronger risk management practices. "This approach not only enhances the overall stability of the financial system but also ensures that institutions with higher risk profiles contribute more to the insurance fund," the deputy governor said. He also emphasised that deposit insurers can further mitigate technology risks by relying on supervisory rating assessments that incorporate evaluation of a financial institution's technological and operational resilience. By using these assessments as a basis for setting insurance premiums or determining intervention strategies, deposit insurers can ensure that their actions are informed by a comprehensive understanding of each institution's risk profile, Swaminathan added. The senior <keyword id="19899808" type="General" weightage="20" keywordseo="RBI" source="keywords">RBI</keyword> official also asked deposit insurers to prioritise crisis preparedness and develop comprehensive contingency plans that account for technology-induced disruptions. This includes conducting regular stress tests and simulations to assess the potential impact of cyber incidents or fintech failures on financial institutions and the broader financial system, he said. The evolving technological landscape presents both significant challenges and opportunities for deposit insurers. By adopting a proactive, risk-based approach, including enhanced oversight, risk-based premiums, reliance on supervisory ratings, faster claim settlements, and industry collaboration, deposit insurers can effectively manage these risks, the deputy governor said.

Risk-based premium for deposit insurance merits consideration: RBI Deputy Governor Swaminathan

The bad assets or gross <keyword id="19964545" type="General" weightage="20" keywordseo="NPAs" source="keywords">NPAs</keyword> of commercial <keyword id="19934118" type="General" weightage="20" keywordseo="banks" source="keywords">banks</keyword> fell to a 12-year low of 2.8% in March 2024 and may go down further to 2.5% by the end of the current fiscal, said the <keyword id="19899808" type="General" weightage="100" keywordseo="RBI" source="keywords" meta.keywordsubtype="org" meta.entityname="RBI" meta.hostid="269" meta.entityid="RBI">RBI</keyword>'s <keyword id="678734" type="General" weightage="20" keywordseo="Financial-Stability-Report" source="Orion">Financial Stability Report</keyword> (FSR) released on Thursday. <keyword id="19982351" type="General" weightage="20" keywordseo="Scheduled-Commercial-Banks" source="keywords" meta.keywordsubtype="org" meta.entityname="Scheduled Commercial Banks" meta.hostid="269" meta.entityid="Scheduled Commercial Banks">Scheduled Commercial Banks</keyword>' (SCBs) gross <keyword id="6401657" type="General" weightage="20" keywordseo="non-performing-assets" source="Orion">non-performing assets</keyword> (<keyword id="19982350" type="General" weightage="20" keywordseo="GNPA" source="keywords">GNPA</keyword>) ratio fell to 2.8%, and the net non-performing assets (NNPA) ratio to 0.6% at the end of March 2024. "The asset quality of SCBs recorded sustained improvement, and their GNPA ratio moderated to a 12-year low in March 2024. Their NNPA ratio too improved to a record low," said the June FSR. Among bank groups, public sector banks (<keyword id="20012926" type="General" weightage="20" keywordseo="PSBs" source="keywords">PSBs</keyword>) recorded a substantial reduction (76 bps) in their GNPA ratio during H2 2023-24. While the GNPA stock decreased across all bank groups, active and deep provisioning by PSBs and foreign banks (FBs) resulted in an improved provisioning coverage ratio (PCR) in March 2024, the report said. The half-yearly slippage ratio (viz, new NPA accretions as a share of standard advances) decreased across bank groups. Though the amount of write-offs declined during the year, the write-off ratio remained almost at the same level a year ago due to a reduction in GNPA stock, the FSR said. Overall, it added the sustained reduction in the GNPA ratio since March 2020 has been primarily due to a persistent fall in new NPA accretions and increased write-offs. The RBI said macro stress tests are performed to assess the resilience of SCBs' balance sheets to unforeseen shocks emanating from the macroeconomic environment. These tests attempt to assess capital ratios over a one-year horizon under a baseline and two adverse (medium and severe) scenarios. "The GNPA ratio of all SCBs may improve to 2.5% by March 2025 under the baseline scenario," the report said. However, if the macroeconomic environment worsens to a severe stress scenario, the ratio may rise to 3.4%. Under the severe stress scenario, the GNPA ratios of PSBs may increase from 3.7% in March 2024 to 4.1% in March 2025, whereas it may go up from 1.8% to 2.8% for private sector banks and from 1.2% to 1.3% for FBs. The <keyword id="20089808" type="General" weightage="20" keywordseo="financial-stability" source="keywords">Financial Stability</keyword> Report reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on the resilience of the Indian financial system and risks to financial stability. The report further said deposit mobilisation by SCBs gathered pace during 2023-24, with a large portion of new accretions in the form of term deposits. "Interest rates became more attractive as banks stepped up efforts to mobilise funds to match the rapid rise in credit demand. Growth in current account and savings account (CASA) accelerated across all bank groups," the RBI said. According to the report, bank credit accelerated during H2 2023-24 among public sector banks (PSBs) and foreign banks (FBs), whereas it moderated in respect of private sector banks (PVBs). The share of credit to the services sector and personal loans in the aggregate loan portfolio increased. Personal loans accounted for over half of PVBs' <keyword id="19998083" type="General" weightage="20" keywordseo="credit-growth" source="keywords">credit growth</keyword>. The expansion in personal loans was broad-based, led by housing loans and followed by other personal loans.

Banks' gross NPAs at 12-yr low, may fall further to 2.5%: RBI report

New Delhi, India's services sector activity eased in August but growth rates for new orders remain elevated, as services firms indicated the sharpest upturn in new export business which acted as a catalyst for firms to expand their workforces as well as output, a monthly survey said on Tuesday. Despite falling from 62.3 in July to 60.1 in August, the seasonally adjusted S&amp;P Global India Services PMI Business Activity Index indicated one of the strongest increases in output seen since mid-2010. For the 25th straight month, the headline figure was above the neutral 50 threshold. In Purchasing Managers' Index (PMI) parlance, a print above 50 means expansion while a score below 50 denotes contraction. "Indian services companies achieved a remarkable milestone in August, as they welcomed a series record surge in new export business. Several regions contributed to the upturn, including Asia Pacific, Europe, North America and the Middle East," <keyword id="2835710" type="General" weightage="50" keywordseo="pollyanna-de-lima" source="Orion">Pollyanna De Lima</keyword>, Economics Associate Director at S&amp;P Global Market Intelligence, said. Lima further noted that this spike in international demand supported one of the best sales performances recorded over the past 13 years, and acted as a catalyst for firms to expand their workforces as well as output. "Demand strength also fostered a heightened sense of optimism regarding the outlook, boding well for economic growth prospects," Lima said. On August 10, the <keyword id="6354335" type="General" weightage="50" keywordseo="reserve-bank-of-india" source="Orion">Reserve Bank of India</keyword> (RBI) left its key interest rates unchanged for a third straight meeting but signalled tighter policy if food prices drive inflation higher. The next meeting of the <keyword id="3446352" type="General" weightage="50" keywordseo="rbi-monetary-policy-committee" source="Orion">RBI Monetary Policy Committee</keyword> (MPC) is scheduled for October 4-6. On the prices front, buoyant demand for services meanwhile aided a further upward revision to selling prices. The rate of charge inflation quickened to the joint-fastest in over six years, while input costs rose to a lesser extent. "... Favourable demand trends also led to the joint-fastest increase in prices charged for Indian services in over six years, which may prompt attention from policymakers and potentially delay cuts to the benchmark repo rate," Lima added. On the jobs front, hiring activity across India's service economy continued to expand. The rate of job creation was moderate, but the strongest seen since last November. Going ahead, monitored companies firmly believed that output would remain on an upward growth path over the course of the coming 12 months. Advertising, demand strength, plans to price competitively and a healthy number of client enquiries all boosted optimism in August. Meanwhile, there was a mild slowdown in the growth of private sector activity across India during August. The S&amp;P Global India Composite PMI Output Index -- which measures combined services and manufacturing output -- fell from 61.9 in July to 60.9 in August. Despite the fall, the S&amp;P Global India Composite PMI Output Index was indicative of a sharp rate of expansion that was among the strongest in over 12 years, the survey said. The S&amp;P Global India Services PMI is compiled by S&amp;P Global from responses to questionnaires sent to a panel of around 400 service sector companies. The panel is stratified by detailed sector and company workforce size, based on contributions to GDP. Data collection began in December 2005.

India's services sector activity moderates in August; exports expand at record pace

The <keyword id="20150760" type="General" weightage="20" keywordseo="SP-Global-Market-Intelligence" source="keywords" meta.keywordsubtype="org" meta.entityname="S&amp;P Global Market Intelligence" meta.hostid="261" meta.entityid="S&amp;P Global Market Intelligence">S&amp;P Global Market Intelligence</keyword> has upwardly revised <keyword id="22162557" type="General" weightage="100" keywordseo="GDP-forecasts" source="keywords">GDP forecasts</keyword> for <keyword id="19894886" type="General" weightage="20" keywordseo="China" source="keywords">China</keyword> in its latest report. But even with the revised forecast, China's GDP growth will be substantially lower than that of <keyword id="19895063" type="General" weightage="20" keywordseo="India" source="keywords">India</keyword>. According to S&amp;P, India's GDP is projected to grow at a rate of 6.7 per cent in 2024 and 6.3 per cent in 2025. In contrast, China's <keyword id="19931030" type="General" weightage="20" keywordseo="economy" source="keywords">economy</keyword> is now forecasted to grow at 5.0 per cent in 2024 and forecast moderately raised to 4.6 per cent from 4.5 per cent. The agency revised China's estimate due to policy tailwinds expected to extend into next year and a gradual improvement in private-sector sentiment within the country. However, the <keyword id="19899810" type="General" weightage="20" keywordseo="reserve-bank-of-india" source="keywords">Reserve Bank of India</keyword> (<keyword id="19899808" type="General" weightage="20" keywordseo="RBI" source="keywords">RBI</keyword>) in its monetary policy has raised the GDP forecast of India from 7 per cent to 7.2 per cent for FY25. RBI Governor Shaktikanta Das said, "The real GDP growth for the current financial year 2024-25 is projected at 7.2 per cent with Q1 at 7.3 per cent, Q2 at 7.2 per cent, Q3 at 7.3 per cent, and Q4 at 7.2 per cent. The risks are evenly balanced." RBI Governor further said that, "The GDP growth projection, we have increased it from 7 per cent to 7.2 per cent and the inflation projection, the average for the year, we have retained it at 4.5 per cent as it was in the last MPC meeting." The <keyword id="22162558" type="General" weightage="20" keywordseo="SP-Global-Market" source="keywords">S&amp;P Global Market</keyword> Intelligence however has lowered the growth forecasts of US, Canada, Brazil, and Japan for 2024, while it has revised upward the forecasts for China, the Eurozone, the UK, and Russia. Additionally, the <keyword id="22162559" type="General" weightage="20" keywordseo="global-growth-forecast" source="keywords">global growth forecast</keyword> for 2025 has edged up from 2.7 per cent to 2.8 per cent, with higher forecasts for some of the larger countries, including the US and China. Regarding Japan, the agency maintains that the next rate hike by the Bank of Japan is most likely to occur in October 2024, given the economic and inflationary headwinds. In the Asia-Pacific region, the agency predicts that real GDP growth, excluding mainland China and Japan, will remain broadly stable at 4.4 per cent in 2024 and 2025, driven by robust domestic demand and recovering exports. A pickup in overseas demand is seen as the key growth driver for the region in 2024.

S&P Global Market raised growth forecast of China, still significantly lower than India

<div type="image" title="The RBI has cracked the regulatory whip on NBFCs and banks, who&amp;#39;ve been pushing microfinance and unsecured loans aggressively to grow their loan books." agency="ANI" msid="114778648" hostid="261" caption="&amp;lt;p&amp;gt;The RBI has cracked the regulatory whip on NBFCs and banks, who&amp;#39;ve been pushing microfinance and unsecured loans aggressively to grow their loan books.&amp;lt;/p&amp;gt;"></div> Imagine this. You have a younger sibling you’re mighty envious of. And why not? Unlike you, they seem to enjoy all the freedom and money in the world. They party like there’s no tomorrow, and here you are, stuck in a boring, ultra-disciplined but responsible routine that feels completely devoid of any independence, and mostly, funds. But of late, things are changing. This sibling is in massive trouble and just cannot escape the parent’s wrath anymore. Long story short, the party is over, and it is time to go back home. The rising defaults on this sibling’s part have now begun pulling the entire house down, thereby attracting the regulator’s ire. <h2>The Wild West of <keyword id="113684" type="General" weightage="20" keywordseo="microfinance" source="Orion">microfinance</keyword> and unsecured loans</h2>It's hard to ignore the issues with microfinance and unsecured loans in India. Many saw them as a small gamble and ignored the rising defaults much like the younger siblings’ tantrums, and now they find themselves in hot waters. The skyrocketing instances of non-payments aren't a micro-issue anymore and are threatening the stability of the entire banking system. In the quarter ended September 30, 2024, 5 of India’s 8 largest private sector <keyword id="19934118" type="General" weightage="20" keywordseo="banks" source="keywords">banks</keyword> reported a steep rise in their bad loan book, mostly thanks to microfinance loans. Some banks, in a bid to strengthen their fortress against these <keyword id="142154" type="General" weightage="100" keywordseo="bad-loans" source="Orion">bad loans</keyword>, have significantly upped their provisions. For instance, IndusInd Bank set aside Rs 525 crore during July and September 2024 to battle the menace of defaults on microfinance loans, which make up about 9% of its total loan book. See, banks rely heavily on their interest income, which they earn from advancing loans. Any loan where the borrower has not paid interest to the bank or defaulted for 90 days or more becomes bad, i.e. an NPA, or non-performing asset for the bank. And who likes things going bad? Simply put, there has been a steep rise in three areas, much to the dislike of banks and MFIs (micro-finance institutions). But hey, it's mostly their doing! <ol><li>GNPA ratio (gross net performing assets): The quantum of non-performing assets a bank has in proportion to its total assets.</li><li>Provision: The amount banks set aside to take care of such NPAs.</li><li>Slippage ratio: The rate at which good girls go bad, or the speed at which good loans turn into NPAs</li></ol>But how are these plaguing the Indian banking sector? And what does the road ahead look like? We decode it for you. <h2> Microfinance: A not-so-micro-menace</h2>Microfinance loans were initially brought forth for low-income households and individuals i.e. for those who might not generally have access to traditional ways of credit, like bank loans and more. They don’t require collateral or an asset to be pledged in lieu of the loan, making it a tad bit easier for borrowers. As of June 2024, the amount of outstanding loans in the microfinance industry stood at a staggering Rs 4,20,256 crore. Of this, NBFC-MFIs accounted for 40% and banks made for 33% of these. In 2022, RBI, in a bid to inspire some competition in this space, did something radical-they did away with the ceiling on how much interest MFIs could charge their customers. Previously, MFIs could add up to 12% to their cost of acquiring funds to determine the final interest rate chargeable to the consumer. So, assuming that Bank A incurs a 5% cost to acquire funds for further loaning, A could charge up to 17% interest from the end consumer. So, interest rates were in the hands of MFIs, and boy, did they have a gala time with it. Instead of spurring some healthy competition, as RBI expected, MFIs and banks went rogue and all guns blazing, competing for the title of “Who will charge the highest interest?” Recently, RBI banned 4 microfinance institutions (MFIs), namely Asirvad Micro Finance Limited, Arohan Financial Services Limited, DMI Finance Private Limited, and <keyword id="20117932" type="General" weightage="20" keywordseo="navi-finserv" source="keywords">Navi Finserv</keyword> from disbursing loans effective October 21, 2024. Why? Because they were charging 14% extra interest over their original cost of funds. To maintain their loan books (and pockets), banks and NBFCs resorted to shady practices like netting off loans, which RBI has now advised MFIs against. Here, lenders allow borrowers to settle a previous outstanding loan by issuing them a new loan! As crazy as it sounds, it helped banks to report less of their total assets as NPAs, since the new credit would cover pending instalments of the borrower’s previous loan. Then there was the issue of borrowers overleveraging, i.e. taking multiple loans using different IDs from various lenders and then failing to honour any of them. The consequence? Banks and NBFCs end up with massive NPAs. Data from credit bureaus suggests that over the last quarter, there was a 17.2% rise in the number of borrowers who had 5 or more active loans at the same time. <h2>Growth &gt; Caution</h2>It's an age-old tale unfolding yet again in India’s banking sector- Icarus flew too close to the sun and eventually, fell to its death. Between April and June 2024, NBFCs microfinance portfolio jumped by 2.7%. If you see this in terms of loan sources, microfinance loans issued by banks grew by 11.2% in Q1FY25. But the same portfolio in NBFCs swelled by almost double-23.9%. While most of these loans had an average ticket size between Rs 30,000-50,000, there was a sharp spike in the number of loans that had a ticket size of Rs 80,000 or more. Data suggests that as of March 2024, more than 12% of all microfinance borrowers had over 4 or more active loans. In dating parlance, this is a classic case of borrowers going polyamorous, minus the honesty and transparency. Not the best of situations, you'd agree! <h2>Will banks and NBFCs stand up to this stress?</h2>If their results for Q2FY25 are to be believed, NBFCs are not handling the pressure all that well. Or even slightly well. Only a few banks like Bank of Baroda (BoB), ICICI, and Indian Bank were up for the battle, even witnessing a decline in their loan delinquencies. Some others, like IndusInd Bank, saw their stock dip by a massive 16.2% over the last 5 days. Its slippages in the previous quarter burgeoned from Rs 15.3 billion in Q1FY25 to Rs 17.9 billion in Q2. As a result, the bank pushed a staggeringly high amount of money to create an NPA cushion for itself. While its management has highlighted its preference for secured lending, that was hardly reflected in its actions during the quarter, where growth in unsecured personal loans remained exceptionally high at over 7% on a QoQ basis. Turns out, only 44% of customers in IndusInd Banks’ microfinance loan portfolio were exclusive to it. The rest 47% were, you guessed it right-polyamorous! 27% had borrowed from another lender as well, apart from IndusInd Bank, while 20% were those who had outstanding loans with two other lenders, apart from IndusInd Bank. IndusInd Bank’s credit card segment did not miss the NPA bus and accounted for 7-8% of its GNPAs. Canara Bank’s total slippages during the previous quarter jumped to Rs 11.1 billion, up by 24.7% QoQ, and making up for 3.6% of its total loans. As for Bandhan Bank, its gross NPA for Q2FY25 inched up on a QoQ basis, up from 4.23% in Q1, to 4.68% in the second quarter. IDFC Bank’s heavy provisioning for its NPAs marred its profits significantly, causing its PAT (profit after tax) to dip by 73% on a YoY basis. Data from ICRA Analytics suggest that the AUM (asset under management) growth in microfinance loans and unsecured (personal and business) loans by the NBFCs will moderate to 10-12% and 19-21%, respectively, in FY2025 compared to 30% and 38%, in FY2024. Says A M Karthik, Senior Vice President &amp; Co-Group Head, Financial Sector Ratings, ICRA, “As bank funds constitute a larger share in the overall funding of NBFCs, a slower credit flow from banks to the NBFCs will compress their AUM growth. The NBFCs in unsecured and digital lending businesses shall face a higher squeeze in funding compared to others, and the unsecured lending space will continue to be a source of stress in the near term.” There has been uninhibited growth in <keyword id="6051027" type="General" weightage="20" keywordseo="Unsecured-loan" source="Orion">unsecured loan</keyword>s, apart from just the microfinance segment. For instance, Axis Bank’s gross slippages jumped by Rs 4,443 crore, largely thanks to its unsecured business. The same is the case with Yes Bank, which saw 35–40% of its retail slippages emerging from the unsecured loan portfolio. <keyword id="6376194" type="General" weightage="20" keywordseo="kotak-mahindra" source="Orion">Kotak Mahindra</keyword> Bank was also quick to follow Yes Bank’s suit, with around 35%-40% of its slippages coming from credit cards. <h2>How is the road ahead?</h2>While RBI has just cracked its whip and served a warning at the moment, experts at Morgan Stanley believe that more changes (read regulatory lashes) are underway. Moreover, with both festive and wedding seasons underway in our country, unsecured lending might pick up momentum, much to the disdain of the calibrated approach banks have been taking towards it so far. But if the situation doesn't improve, RBI will not waste any time in becoming the typical tyrannical <keyword id="19897820" type="General" weightage="20" keywordseo="bollywood" source="keywords">Bollywood</keyword> headmaster who runs his dominion with an iron fist. However, that's a story for another day. Do you have a topic in mind you'd want a simpler explanation for, or insights or personal experience to share on personal finance and more? Contact us at businessinsider@timesinternet.in.

You Searched For "rbi committee on private sector banking" and got 9 results

RBIs MPC meet concludes today: Repo rate left unchanged at 6.5%

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Loan-to-deposit ratio will subside on its own in coming months, notes Motilal Oswal report

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Is the lending party over? The dangerous tango of Indian banks with microfinance and unsecured loans

Ira Alok Puranik

RBI penalties on banks, NBFCs add up to Rs 40.39 crore for 2022-23

IANS

Risk-based premium for deposit insurance merits consideration: RBI Deputy Governor Swaminathan

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Banks' gross NPAs at 12-yr low, may fall further to 2.5%: RBI report

PTI

India's services sector activity moderates in August; exports expand at record pace

PTI

S&P Global Market raised growth forecast of China, still significantly lower than India

ANI

Simply Put: Is the lending party over? The dangerous tango of Indian banks with microfinance and unsecured loans

Ira Alok Puranik

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