In the past one year, the 50-stock Nifty index has risen by 19%, while the 12-stock Bank Nifty index has remarkably outperformed the benchmark by rising 25%. This outperformance of banking stocks on the stock market indicates an encouraging improvement in the health of the banking sector in India.
The banking sector in India demonstrated remarkable resilience during the Covid-19 pandemic and has sustained healthy growth rates. Particularly, in the fiscal year FY22-23, the banking sector experienced one of its most successful periods in a decade, evident from significant improvements in various key metrics such as credit growth, profitability, management of bad assets, capital adequacy, and provisioning. This stands in stark contrast to the banking turmoil witnessed in the US and Europe, where major difficulties were faced during the same period.
The recently released ‘Financial Stability Report’ of the Reserve Bank of India (RBI) also highlights the strong performance of the Indian banking system, even in the face of adverse global developments. The FSR report is widely followed as a key tool to assess various risks within the system.
Financial regulators and central banks in over 60 countries publish FSR bi-annually after conducting assessments and undertaking stress tests to gauge the health of their respective banking systems. In line with this global trend, the RBI has also been publishing FSR bi-annually since 2009.
So, what are FSR’s observations? The FSR highlights that despite global headwinds, the Indian economy and the domestic financial system remain resilient, supported by strong macroeconomic fundamentals.
Before delving into the factors that drove the banking sector’s current performance, here are a few takeaways from the FSR report:
BAD ASSETS
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