Bad loans

PRESIDENT Droupadi Murmu’s address to Parliament on Thursday coincided with the release of the Reserve Bank of India’s Financial Stability Report (FSR). The President mentioned that the government had carried out reforms over the past decade to save India’s banking sector, enacting laws such as the Insolvency and Bankruptcy Code (IBC). She stated that the non-performing assets (NPA) of public sector banks were continuously decreasing. This is borne out by the FSR, which says that the gross NPA ratio of scheduled commercial banks fell to 2.8 per cent and the net NPA ratio decreased to 0.6 per cent at the end of March this year. As per the RBI, the gross bad loan ratio of banks has reached a 12-year low. This significant drop indicates that banks are managing their bad loans in a better way, reducing the risks of defaults.

Non-performing assets are an impediment to the long-term growth and stability of the Indian banking sector; their impact on the overall health of the economy cannot be overemphasised. Since its enactment in 2016, the IBC has helped many banks and financial lenders realise their dues by streamlining the process of resolving insolvency cases. This is very important for the world’s fastest-growing major economy, which aims to become the go-to destination for global investors. Doubts and apprehensions about India’s legal and regulatory framework can be detrimental to the confidence of investors.

The RBI has noted that with healthier balance sheets, banks and financial institutions are actively supporting economic activities through consistent credit expansion, while the President has claimed that India’s banking sector is one of the strongest in the world. These observations should be reassuring for domestic investors, even as there is room for improvement in terms of making banks more robust and profitable. Every customer is concerned about the safety of his or her deposits and investments; the banks’ ability to handle financial shocks and minimise risks can make a huge difference to their fiscal health.

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