The three big problems in India’s banking sector, according to the RBI

More pain ahead.
More pain ahead.
Image: Reuters/Danish Siddiqui
We may earn a commission from links on this page.

India’s central bank has some big concerns about the sustainability of the country’s banking system.

In its bi-annual Financial Stability Report (FSR) (pdf), released on June 30, the Reserve Bank of India (RBI) warned that the sector is under severe stress, with mounting bad loans and an increase in bank fraud, among other issues. All this, the RBI says, could drag down India’s economy.

“Weak investment demand, partly emanating from the twin balance sheet problem (a leveraged corporate sector alongside a stressed banking sector) is a major challenge,” the report said.

Here are the key problems plaguing India’s banking sector, according to the RBI:

Bad loans

At nearly Rs10 lakh crore, India’s pile of bad loans is bigger than the gross domestic products of at least 137 countries. But so far, the RBI’s attempts to reduce Non-Performing Assets (NPAs) in the banking sector have yielded little result.

The share of gross NPAs in India could inch up to 10.2% by March 2018, from 9.6% in March 2017, according to the FSR. In September 2016, gross NPAs were at 9.2%.

Currently, the worst-hit are the state-owned banks, which dominate the Indian banking system. In March 2017, the average bad loans of PSBs stood at 75% of their net worth. These bad loans are squeezing banks’ profitability and capital positions, threatening the health of some of India’s biggest banks.

In the report, the RBI cautioned that the situation could get worse with any unforseen stress in the economy.

Cyber threats

An estimated 95% of transactions in India are paid for in cash but with the growing penetration of computers and smartphones, and increasing access to the internet, Indians are taking to digital channels for their banking needs. Cybercrime is becoming a greater threat as a result.

The FSR  labeled cyber-attacks as a high-risk zone for India’s banking sector. The RBI classifies bank fraud as transactions involving any cheating, negligence, misappropriation of funds, or forged documents.

“Not only simple attacks using phishing, vishing and social engineering, but also increasingly audacious attacks by organised gangs with or without backing by state players have come to light,” the RBI said.

The clamour to secure India’s banking system increased following a massive data breach of 3.2 million debit and credit cards last year, one of the biggest attacks in the country. Another red flag was the recent global ransomware attack that affected the computer systems of governments and several companies in various countries, including India. 

The RBI recommended that banks invest in preventive software and frequently assess the risks at hand, not just for in-house operations but also for the external vendors that the lenders employ.

Bank fraud

Another pressing concern for the banking regulator is the increased number of fraudulent transactions at Indian banks. What’s adding to the concerns is that banks often seem reluctant to report these cases.

“Almost all corporate loan-related fraud cases get seasoned for two to three years as NPAs before they are reported as fraud,” the RBI said in the report.

In the last five years, the volume of bank fraud has increased by 19.6% to 5,064 cases.