The Reserve Bank of India today released the statutory Report on Trend and Progress of Banking in India 2012-13. This Report presents the performance and salient policy measures relating to the banking sector during 2012-13. The Report also provides an analysis of the co-operative banks and non-banking financial institutions.

The key messages of the Report are set out below:

Perspectives on the Indian Banking Sector

• The weakening domestic macroeconomic conditions combined with the continuing subdued global growth posed challenges to the banking sector during 2012-13. However, the comfortable capital base continues to lend resilience to the Indian banking sector (para 1.1, page 1).
• The regulatory and supervisory policy responses during the year pertained to initiatives for implementing risk-based supervision, enhanced oversight of financial conglomerates and steps towards improved co-ordination among regulators, besides positioning banks to meet the needs of inclusive growth (para 1.11-1.17, pages 4-6).
• Initiatives were undertaken to expand the banking system, increase competition, further strengthen the payments and settlement mechanism and fortification of capital (para 1.18-1.21, pages 6-7).
• At the present juncture, the key issues related to the Indian banking sector include:

• effective reduction in NPAs and improvements in the loan recovery process;
• need to achieve sustainable financial inclusion through suitable business and delivery models;
• need to stimulate and foster competition in the banking sector and liberalise licensing policies; and
• need for decisive changes in the present banking structure to enable it to grow in size, resources, efficiency and inclusivity (para 1.25-1.28, pages 8-9; para 1.33-1.34, page 10).

Global Banking Developments

• Globally, the banks continued their efforts to repair their balance sheets and improve their capital ratios, albeit at an uneven pace across countries (para 2.3, page 12; para 2.12, page 16).
• The growth in global credit was multi-paced. The return on assets (RoA) improved for banks in the US and some emerging market and developing economies (EMDEs), but declined in European countries (para 2.4, para 2.6-2.7, page 12).
• Financial conditions in the global banking system improved following monetary easing measures by central banks in advanced economies (para 2.8, page 12).
• The global regulatory reforms initiated in 2009 to strengthen the financial sector and to support sustainable economic growth by reducing future risks progressed in many areas such as Basel III framework, systemically important financial institutions (SIFI) and financial market infrastructures (para 2.28-2.35; pages 26-27).

Policy Environment

• Many initiatives were undertaken in the sphere of regulatory and supervisory policies during the year. These include issuing guidelines for new bank licences, rationalising branch authorisation policy and revision in policy regarding restructuring of advances by banks/financial institutions. Also, policy framework was released for setting up of wholly owned subsidiaries by foreign banks in India (para 3.24-3.29, pages 34-36; para 3.40-41, pages 38-39).
• Measures were also introduced for rationalisation of bank lending against gold and bank finance for purchase of gold. Discussion papers on banking structure and dynamic provisioning framework were released and risk-based supervisory approach for banks was adopted (para 3.30-3.31, para 3.33-3.34, pages 36-37; para 3.48, page 41).
• Significant headway was made in improving credit delivery channels, credit flow towards productive sectors and financial inclusion by revising priority sector loan limits and refocusing on credit growth to micro and small enterprises. Further, bank licence was issued to Bharatiya Mahila Bank Ltd. to address gender related aspects of empowerment (para 3.10, para 3.12-3.13, pages 31-32; para 3.18-3.20, page 33).

Operations and Performance of Commercial Banks

• Against the backdrop of a slowdown in the domestic economy and tepid global recovery, the growth of the Indian banking sector slowed down for the second consecutive year in 2012-13 (para 4.3, page 55).
• Both balance sheet and off-balance sheet operations of Indian banks slowed down in 2012-13. There was a slowdown in credit growth to all productive sectors though retail credit remained buoyant (para 4.3, page 55).
• The lower credit off-take, despite the softening of interest rates, affected the profits of SCBs with all major indicators of profitability, viz., return on assets (RoA) and return on equity (RoE) showing a decline during the year. New private sector banks and foreign banks, however, could improve their RoA with the help of reduced operational costs (para 4.13-4.14, pages 60-61).
• The ratio of NPAs increased further during 2012-13. There was a rise in the slippage ratio as well as the ratio of restructured advances to gross advances (para 4.19-4.22, pages 65-67).
• The increased stress in asset quality during the year was primarily on account of non-priority sectors. There was a rise in the NPA ratios for the industrial and infrastructural sectors (para 4.25, page 68).
• The capital adequacy positions of SCBs remained above the stipulated norm at the aggregate and bank group-levels (para 4.17-4.18, page 65).
• With the completion of three years of financial inclusion plans, there were signs of considerable progress in terms of expanding the outreach of banking through both branch and non-branch means. While banking outlets were provided in almost all identified unbanked villages with a population of more than 2,000, the process of bringing in unbanked villages with a population of less than 2,000 was in progress during the year (para 4.59, page 83).

Developments in Co-operative Banking

• Urban Co-operative Banks (UCBs) registered a stable growth in assets during 2012-13 but there was some moderation in profitability. The asset quality of these institutions witnessed sustained improvement (para 5.13, page 95; para 5.17, page 99).
• With regard to rural co-operatives, State Co-operative Banks (StCBs) and District Central Co-operative Banks (DCCBs) showed improvement in profitability and asset quality in 2011-12. The Primary Agricultural Credit Societies (PACS) incurred losses outpacing the profitability of StCBs and DCCBs during 2011-12 resulting in losses for the short-term co-operative credit structure (para 5.25, page 104; para 5.28-5.29, pages 105-106; para 5.34-5.35, pages 107-108).
• The long-term rural co-operative credit institutions continued to witness losses and also exhibited weak asset quality in 2011-12 (para 5.45-5.46, page 113; para 5.49-5.50, page 115).

Non-Banking Financial Institutions

• Financial performance of Financial Institutions (FIs) improved during 2012-13 in terms of both operating and net profits (para 6.9, page 121).
• During 2012-13, net profits of Non-Banking Financial Companies - Deposit taking (NBFCs-D) and Systemically Important Non-Deposit taking NBFCs (NBFCs-ND-SI) showed only marginal improvement (para 6.30, page 130; para 6.41, page 135).
• Profits of Standalone Primary Dealers showed a significant expansion (para 6.50, page 138).
• Overall asset quality of a large part of the NBFI sector deteriorated during the year, partly reflecting economic slowdown (para 6.52, page 140).
• With regard to capital adequacy, the entire NBFI sector was comfortably placed (para 6.52, page 140).

Sangeeta Das

Director

Risk-based supervision strengthened to enhance banking resilience, address asset quality, and promote inclusive financial expansion. The report finds that a comfortable capital base supported banking sector resilience despite weakening macroeconomic conditions and subdued global growth, while credit growth and profitability slowed and asset quality deteriorated with rising NPAs-especially in non-priority sectors. Regulatory initiatives concentrated on implementing risk-based supervision, enhancing oversight of financial conglomerates, rationalising licensing and branch policies, and strengthening payments, credit delivery, and financial inclusion. Co-operative banks exhibited mixed performance and NBFIs showed improved profits amid broader asset-quality stress; aggregate capital adequacy remained comfortable across banks and NBFIs.