RBI Financial Stability Report: Three Banks Continue To Display Risky Metrics
The Reserve Bank of India's Financial Stability Report shows that three banks, accounting for 15% of banking system assets, fall short in key risk metrics despite sector-wide improvements.
Despite a sharp improvement in risk metrics among banks in India, Reserve Bank of India said on Monday that some lenders continue to trend lower. The details were announced as part of the RBI's half-yearly financial stability report.
At the beginning of the current decade, three-fourths out of 33 public and private sector banks analysed under the 'key risk indicators' framework were found deficient in three or more KRIs.
"In September 2024, however, only three banks forming 15 per cent of total banking system assets have been found to be deficient in three KRIs," RBI said in its FSR. There were no banks which were deficient in more than three KRIs, the regulator added.
The KRI framework, formulated by the International Monetary Fund measures vulnerability of banks by integrating the CAMELS supervisory framework with market-based metrics and flags institutions based on specified thresholds that vary by jurisdictions.
The framework monitors five key indicators which form a bank's overall risk. These include capital adequacy, asset quality, earnings, liquidity and market metrics.
The central bank also presented some insights in to the business dynamics within the banking sector. While the loan growth has been running at 13.4% 3-month moving average, in September 2024, investments recorded lower growth of 7.6% (3-MMA), resulting in 11.2% growth (3-MMA) in the combined assets (loan + investment), same as deposit growth of 11.2% (3-MMA).
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Similarly, an increase in bank profits and resultant rise in equity capital has been a significant additional source of funds, which contributed to an increase in loan-deposit ratio, the RBI said.
Bank reliance on borrowings for bridging the financing gap rose as loan growth outpaced deposit growth leading to an increase in loan-deposit ratio.
Lower deposit growth, especially in the low cost current account savings account segment, pushed up cost of funds for banks. Banks’ cost of funds rose by 148 basis points since March 2022. As a result, banks’ net interest margin and profitability face pressure from stiffer competition for funds, the central bank said.
