Banks' balance sheets are expected to continue to improve after a long period

- Low volume of NPAs is an essential deposit aspect of the country's banking sector

After a long period, the performance of the banking sector of the country is being seen as encouraging. The September quarter of the current financial year has seen a significant rise in banks' profits and a decline in the proportion of non-performing assets (NPAs) or bad loans on the books. Twelve public sector banks posted an aggregate net profit of Rs 25,685 crore in the September quarter, a fifty percent increase over the second quarter of the previous financial year. Net profit has increased by 68 percent on a quarterly basis. Such healthy performance of public sector banks has not been seen before. In addition to public sector banks, the overall net profit of 18 listed private banks increased by 64 percent year-on-year to Rs 32,150 crore. Thus, the net profit of each of the listed banks in the private and public sector has increased by 57 percent to Rs 57,834 crore in the September quarter.

The increase in net profit has been seen due to reduction in bad loans and provision for meeting contingencies. As NPAs decline and new NPAs are less, banks do not need to make as much provisioning as before. The main reason for the increase in net profit of banks is the increase in net interest income. 22 percent growth has been seen in net interest income.

The growth in lending to domestic companies by India's banking sector continues to be high. Credit growth is seen increasing as capacity expansion programs are undertaken by private companies. The highest demand for credit is seen from sectors like infrastructure, real estate, iron and steel.

In order to provide support to small industries during the Corona period, the government had released a special credit scheme and announced to provide loans to such industries. However, since the government itself was the guarantor for this, there was no hesitation in releasing loans for the banks. However, apart from economic recovery and special schemes, the current government's planning of loan fairs is being considered responsible for credit growth. Aggressive credit growth could limit the country's banks' ability to absorb potential future losses, Fitch Ratings recently warned.

On one hand, the performance of banks is encouraging, while on the other hand, the net profit and profit margin of companies are decreasing. As a result of increase in interest rates and high cost of raw materials, the profits of companies are coming under pressure. As the results season for the second quarter of financial year 2023 is almost over, in the results so far, the results of companies in other sectors, except banking and information technology sector, are seen to be weak. The performance of some sectors like cement, metals, real estate, oil marketing is seen to be weak. The picture shows that the results of companies in this sector have been lower than expected. Due to poor results, the sword of rating downgrade hangs over companies in this sector. In the event of a downgrade, there is a risk that companies will be limited in raising new funds.

In his report on the administration of the boards of state-owned banks of the country, J. P. The Nayak committee suggested removing the discretion of the governors in public sector banks and allowing them to be run only by the Reserve Bank so that these banks get autonomy in functioning. The managers of public sector banks also often voice similar sentiments. It is a fact that public sector banks have to bow down to political pressure. In the recent past, the skyrocketing NPAs of public sector banks have also been attributed to the interference of political parties in the functioning of banks. The government policy of favoring certain sectors took its toll on the banking system. Apart from agriculture sector, the NPAs of banks also increased due to loans from infrastructure sector, steel, real estate sector.

The Nayak Committee said that only the Reserve Bank should regulate public sector banks. Banks should be accountable not only to RBI but to both Ministry of Finance and RBI. It has been seen several times in the past that the Ministry of Finance has been insisting that the Reserve Bank should follow its instructions.

In any economy, the policy of promoting credit schemes to business and industry is welcome, but the tendency of banks to hold loan fairs and instruct people to provide money on the front lines is tantamount to meddling in banking operations. The current government had claimed several times before coming to power that its government would not interfere in the working of banks, but the previous instructions given by the current government to organize loan fairs point to something different. Stricter laws such as the Insolvency and Bankruptcy Code (IBC) have speeded up the recovery of bad loans, not only reducing the rate of willful defaults, but also allowing banks to operate without interference from political parties, reducing the need for recapitalization in later years. Let's expect it to come, so that the current improved condition of public money banks will not deteriorate and people's money will not be mismanaged.