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Viksit Bharat@2047: Stepping Up Growth Will Boost Macroeconomic Fundamentals And External Strength

Banks enhanced their advances from `75.9 lakh crore in March to `167.8 lakh crore in September

Viksit Bharat@2047: Stepping Up Growth Will Boost Macroeconomic Fundamentals And External Strength

Viksit Bharat@2047: Stepping Up Growth Will Boost Macroeconomic Fundamentals And External Strength
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7 Jan 2025 10:35 AM IST

The drivers of savings, investment and consumption are to given necessary boost apart from manufacturing and exports of both manufactured and services exports. The recent dip in forex reserves needs a push by enhanced export trade and controlled imports

RBI released

The financial stability report which the Reserve Bank of India (RBI) releases twice in a year comes across as the most reliable ready-reckoner as it covers the entire gamut from the financial stability point of view.

It is therefore imperative to study this thoroughly as one can get to identify their respective strengths and weaknesses across stress scenarios vis-à-vis ground realities and prepare accordingly.

The latest RBI report released on December 30 states that as of September 2024, only three banks forming 15 per cent of the sector’s assets were deficient in three KRIs. This is a much better position compared to the one at the beginning of the current decade.

This gets reflected when we analyse the banking sector soundness indicators where gross NPA from a high of 9.6 per cent as on March 17 came come down to 2.6 per cent at the end of September. Net NPA, which was at 5.5 per cent as on March 17, was at its lowest of 0.6 per cent in September. Provisioning Coverage Ratio (PCR) increased substantially from 43.5 per cent as on March 17 to 77 per cent in September.

With the economy growing well, banks could enhance advances from 75.9 lakh crore as of March 17 to 167.8 lakh crore in September. It is heartening to note that with improved credit standards and risk management, banks could reduce the slippage ratio from 5.9 per cent to 1.4 per cent during the period under review. This, in effect, shot the ROA to 1.4 per cent (September 24) as against 0.4 per cent (March 17).

With retained substantial profits and additional capital, CRAR has been maintained at 16.7 per cent (September 24) as against 13.7 per cent (March 17). It is necessary for banks to continue with these favourable indicators and even improve upon them as the risks are few going forward. It thus makes for a viable proposition t0 have a buffer for any eventuality, while at the same time continuing to perform better. The current strong financial strength of the banking system augurs well as greater support and contribution is expected from it in India's journey towards Viksit Bharat.

There are quite favourable aspects of global economy like the control on inflation, slight reduction in the earlier tight monetary policy by way of reducing repo rate and the global economy coming out of the risk of recession. However, there are still some risk factors with main one being inflation that is not fully under control. The other ones are the continuation of political conflicts, high public debt and stretched asset valuations, climate risks and changes in trade policies. The other risks are from emerging technologies like Artificial intelligence, crypto currency and bitcoin. These are resulting in volatility in equity and currency markets that are already visible. These need to be handled with caution.

In the domestic market, except the recent dip in real GDP growth, which is likely to be revived and the expected real GDP growth of 6.6 per cent for 2024-25. But this growth is substantially lesser than the earlier plus eight per cent growth. In order to keep the tempo of eight to 8.5 per cent growth, we need to sustain the growth to achieve the developed economy status by 2047.

The fiscal deficit of both the Centre and states is under control, while the quality of spending on capex is likely to be continued by the government, which can be boosted by private sector investment. The drivers of savings, investment and consumption are to given necessary boost apart from manufacturing and exports of both manufactured and services exports. The recent dip in forex reserves needs a push by enhanced export trade and controlled imports.

There is a need for a further opening of the economy for essential FDI investment given that net FDI has come down compared to the earlier FDI flow in order to supplement domestic investments. According to the RBI, FSR vulnerabilities in the form of stretched equity valuations, pockets of stress in microfinance and consumer credit segments and risks from external spillovers require close monitoring.

Banks have to strengthen the basic function of resource mobilisation as currently even though the deposit growth and credit growth have converged, going forward with the pickup in credit growth, the pace of deposits has to pick up.

The bulge in bulk deposits and certificate of deposits are to be balanced with sufficient growth of CASA. The recent increase in deposit cost is likely to affect the margin unless the high cost of term deposits meet the current yield expectations as equity market either directly or through mutual funds are getting high return are balanced with higher CASA.

RBI macro stress reveals that SCBs aggregate capital would remain much higher than the minimum capital requirements in March 2026 under an adverse scenario. Stress test for NBFCs shows that their CRARs would remain much above the regulatory minimum. This shows the strength of these institutions and their ability to absorb shocks in adverse scenarios which provide comfort.

These have been achieved by the effective role played by all stakeholders, including the government, regulators and financial institutions. These have enabled India to emerge as the fastest growing economy. It has strengthened our resilience of economy, financial sector, capital sector and the mutual funds insurance sector.

Stepping up the growth will enhance our macroeconomic fundamentals and external strength that will help in overcoming periods of uncertainties. We must therefore fully support and stay engaged in the vision of Viksit Bharat by 2047.

(The author is former Chairman & Managing Director of Indian Overseas Bank)

banking sector economic growth RBI Financial Stability Report export trade foreign direct investment 
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