“As a result (of various initiatives of the government), I’m glad to say the problems of twin balance sheets have gone away,” she said, recalling the Reserve Bank of India biannual Financial Stability Report released June 28 that said India now enjoys a twin balance sheet advantage.
The twin balance sheet problem refers to heavily indebted corporates dragging down banks into non-performing assets (NPAs) and losses. The 4R strategy is recognition, recapitalisation, resolution and reform. It called on banks to value assets as close to their true value as possible (recognition). They were strengthened through equity infusion (recapitalisation). Their NPAs were sold or rehabilitated (resolution) and the sector went through reforms to avoid repetition. Public sector banks reported a cumulative Rs 1.04 lakh crore net profit in FY23, tripling from Rs 36,270 crore in FY14.
Gross non-performing assets (GNPA) ratio of scheduled commercial banks dropped to 3.96% at the end of FY23, from 6.04% a year earlier. Rating agency Crisil projects this to drop to a decadal low of 3.8% by the end of FY24. “We find all the banks are doing very well… together with the 4Rs government of India came up with, other things equally helped the banks,” she said.
At the inauguration of the corporate office of the Punjab and Sind Bank, Sitharaman recalled the Insolvency and Bankruptcy Code (IBC) that has helped in recovery of non-performing assets.
There is an improvement in all critical parameters, such as returns on assets, net interest margin and provisioning coverage ratio, she added, recognising the concerted efforts of banks. “The problem of twin balance sheets has gone away,” she said. “Like the Reserve Bank observed, it is a twin balance sheet advantage that the Indian economy is benefiting from.” Sitharaman urged banks to build on their strengths and not “sit back and revel in success.”“They (banks) should also ensure prudent liquidity management, and continue to focus on robust asset liability and risk management,” she said. In its latest Financial Stability Report, the Reserve Bank of India (RBI) noted that the Indian financial system, led by a sound banking system, remains stable and supportive of the productive needs of the economy.“Aided by robust earnings, adequate capital, liquidity buffers and improving asset quality, Indian banks are well positioned to sustain the upturn in the credit cycle that has been underway since early 2022,” the RBI report said.
