Context;
The RBI reported a stable financial system in 2024, characterized by improved asset quality, strong capital buffers, and shifting deposit preferences driven by rising interest rates.
Relevance : GS 3( Banking )
Asset Quality
- GNPA Ratio: Declined to a 12-year low of 2.6% (as of September 2024).
- NNPA Ratio: Stable at 0.6%.
- Provisioning Coverage Ratio (PCR): Improved to 77%, aided by proactive provisioning, particularly by Public Sector Banks (PSBs).
Profitability Trends
- Positive Trends:
- Improvement in return on assets (ROA).
- Increase in earnings before provisions and taxes.
- Challenges:
- Decline in Net Interest Margin (NIM).
- Shift in deposits to higher interest rate buckets.
Banking Resilience
- Supported by:
- Strong capital buffers.
- Robust earnings.
- Sustained asset quality improvement.
Deposit Profile Shift
- Decline in CASA deposits in favor of term deposits offering higher interest rates.
- Moderate growth recorded in loans and deposits during H1 2024.
Implications
- Banking Sector Stability : Strong fundamentals enhance resilience against economic shocks.
- Asset Quality : Reduced NPAs and proactive provisioning improve investor confidence.
- Deposit Behavior : Rising interest rates alter deposit preferences, influencing bank margins.
Outlook
- Focus on maintaining capital buffers and provisioning.
- Monitor deposit profile shifts to adapt to evolving interest rate dynamics.
