RBI Report: Indian Banks Profitability Hits 6-Year High, NPAs Drop To 13-Year Low

The Reserve Bank of India's (RBI) Trends and Progress of Banking in India report, released on December 26, 2023, shows that Indian banks' profitability increased for the sixth consecutive year in 2023-2024. Banks experienced difficulties as a result of rising deposit rates and higher borrowing costs, even as bad loans continued to decline.

According to the RBI report, in FY24, banks saw a return on assets (RoA) of 1.4 per cent and a return on equity (RoE) of 14.6 per cent with profitability remaining robust in the first half of FY25. However, banks had to increase their deposit rates and borrow money at higher interest rates in order to close the credit-deposit gap. This led to a rise in the interest expense-to-income ratio, which increased to 57.4 per cent in FY24, compared to 52.2 per cent in the previous year. As a result, while banks continued to be profitable, the growth rate in operating and net profits slowed.

In March 2024, banks' capital adequacy ratio (CAR) decreased from 17.2 per cent to 16.9 per cent, indicating that they are still well-capitalized despite these constraints. The drop in CAR was mainly due to a rise in risk-weighted assets outpacing the growth in capital funds. However, according to the RBI report, the Tier-I capital ratio stood at 14.8 per cent, and by September 2024, the CAR had risen to 16.8 per cent.

In FY24, the consolidated balance sheet of scheduled commercial banks (SCBs) grew by 15 per cent, which was a significant rise over the 12.2 per cent growth in FY23. Public-sector banks’ share in the balance sheet decreased to 55.2 per cent, while private-sector banks' share increased to 37.5 per cent. Public-sector banks continued to dominate with 59.3 per cent of SCBs' deposits and 55.5 per cent of advances.

With gross non-performing assets (GNPAs) falling 15.9 per cent year over year to Rs 4.8 trillion by March 2024, the asset quality of Indian banks has greatly improved. According to the RBI report, the GNPA ratio fell to 2.7 per cent, its lowest in 13 years, from 3.9 per cent the previous year. This improvement was largely attributed to better recovery processes and upgrades, with nearly half of the NPA reduction stemming from these efforts.

The net non-performing asset (NNPA) ratio also fell to 0.62 per cent by March 2024, a decadal low, further improving to 0.57 per cent by September 2024. While the agricultural sector reported the highest GNPA ratio at 6.2 per cent, retail loans had the lowest ratio at 1.2 per cent.

The NBFC sector also witnessed significant improvements in asset quality, according to the RBI report, supporting financial stability. This has been due to strengthened credit assessments, improved risk management systems, and better recovery mechanisms. NBFCs have become an important part of India’s financial system, providing credit, especially in underserved sectors. Their growing role continues to be a key factor in the overall financial health of the country.