The RBI recently released the Report on Trend and Progress of Banking in India 2023-24 which details the performance of India’s financial ecosystem, encompassing commercial banks, cooperative banks, and non-banking financial institutions. As per the report, Gross NPAs reduced further by March 2024 while Unclaimed Deposits reached a new high by the end of December 2023.
The Reserve Bank of India (RBI) recently released the Report on Trend and Progress of Banking in India 2023-24 in line with Section 36(2) of the Banking Regulation Act, 1949. This comprehensive document delves into the performance of India’s financial ecosystem, encompassing commercial banks, cooperative banks, and non-banking financial institutions. Beyond the numbers, the report sheds light on the shifting dynamics and future prospects of India’s financial landscape.
In today’s story, we look at key highlights and emerging trends from the recently released report.
India’s banking sector at a glance
Commercial banks play a pivotal role in India’s financial ecosystem, especially in channelling credit and advancing financial inclusion. Since the onset of economic reforms, this sector has experienced significant transformations in size, operational efficiency, and financial stability. These changes have strengthened the sector’s ability to serve the economy and support broader growth and development goals.
By the end of March 2024, India’s commercial banking sector comprised 12 public sector banks (PSBs), 21 private sector banks (PVBs), 45 foreign banks (FBs), 12 small finance banks (SFBs), six payments banks (PBs), 43 regional rural banks (RRBs), and two local area banks (LABs). Of the 141 commercial banks, 137 were classified as scheduled banks, while the remaining four were non-scheduled.
Balance sheets grow at 15.5% Y-o-Y, highest in the last decade
The consolidated balance sheet of scheduled commercial banks (SCBs), excluding regional rural banks (RRBs), grew by 15.5% during 2023-24, reflecting the impact of a significant merger, compared to a 12.2% increase in 2022-23. This growth Y-o-Y is the highest in the last decade. This is also the third consecutive year showing double-digit growth Y-o-Y. At the same time, the deposits grew Y-o-Y by 14%, which is also the highest in the last nine years.
Over the same period, the share of public sector banks (PSBs) in the consolidated balance sheet of SCBs declined to 55.2% as of March 2024, down from 57.6% at the end of March 2023. In contrast, private sector banks (PVBs) saw their share rise from 34.7% to 37.5%. PSBs accounted for 59.3% of total deposits and 55.5% of total advances by SCBs at the end of March 2024.
This trend of declining PSB share and rising PVB influence has been consistent in recent years. From March 2022 to March 2023, the PSB share in the consolidated balance sheet fell from 58.6% to 57.6%, while PVBs increased their share from 34.0% to 34.7%. As of March 2023, PSBs held 61.4% of total SCB deposits and accounted for 57.9% of total advances.
Operational Efficiency of banks improves
The spread, a key measure of a bank’s operational efficiency, represents the difference between returns and the cost of funds. The cost of funds is calculated as the ratio of interest expended to the average of deposits and borrowings from the current and previous years. Conversely, the return on funds is determined by the ratio of interest earned on advances and investments to the average of advances and investments from the current and previous years.
A lower cost of funds reflects a bank’s ability to borrow at competitive rates, while a higher return on funds indicates efficient margin generation from investments.
Since 2015-16, data from Scheduled Commercial Banks shows that the spread has risen steadily from 2.9 to a peak of 3.6 in 2022-23, before slightly declining to 3.4 in 2023-24. In 2023-24, the return on funds reached 8.5, marking the second-highest level since 2015-16, while the cost of funds stood at 5.1, aligning with 2018-19 levels. Consequently, the spread has consistently remained above 3 since 2018-19, underscoring the sustained operational efficiency of banks in recent years.
Among banks, Small Finance Banks (SFBs) demonstrate the widest spread, maintaining a spread of 7.5 in 2023-24, consistent with 2021-22, and peaking at 8.0 in 2022-23. Private Sector Banks (PVBs) also outperform Public Sector Banks (PSBs) in terms of spread. Over the last three fiscal years (2021-22 to 2023-24), PVBs recorded spreads of 3.9, 4.3, and 4.1, respectively. In contrast, PSBs registered comparatively lower spreads of 2.9, 3.1, and 2.9 during the same period, reflecting a narrower margin in their operational efficiency.
Gross NPAs at 13-year low
The Indian banking sector witnessed a marked improvement in asset quality during 2022-23 and 2023-24, with the gross non-performing assets (GNPA) ratio falling to its lowest level in over a decade. By 31 March 2024, the GNPAs of scheduled commercial banks (SCBs) had declined by 15.9% year-on-year, totalling ₹4.8 lakh crore. The GNPA ratio (Gross NPA as a percentage of Gross Advances) dropped significantly to 2.7% by March 2024, down from 3.9% at the end of March 2023, marking a 13-year low. The latest supervisory data show that the GNPA ratio fell further to 2.5% as of the end of September 2024. Notably, 44.4% of the reduction in GNPAs during 2023-24 was driven by improved recoveries and upgradations, slightly down from 45% in 2022-23.
At the beginning of 2000-01, India’s gross NPAs stood at ₹6.7 billion, with the GNPA-to-gross advances ratio at 11.4%—the highest recorded since 2000-01. The ratio surged past double digits again in 2017-18, reaching 11.2%, as gross NPAs peaked at an all-time high of ₹10,397 billion. However, by 2023-24, this figure had significantly declined to ₹4,808 billion, with the GNPA ratio dropping to 2.7%, marking a 13-year low and highlighting a significant turnaround in the sector’s asset quality.
Unclaimed deposits at an all-time high since 2005
According to the Reserve Bank of India (RBI) guidelines, a bank account is classified as inoperative or dormant if there are no customer-induced transactions—such as deposits or withdrawals—for over two years. This classification excludes bank-initiated activities like interest credits or service charge debits. Furthermore, accounts that remain inoperative for more than ten years are designated as unclaimed deposits. Banks are required to transfer these unclaimed amounts to the Depositor Education and Awareness (DEA) Fund maintained by the RBI.
By the end of 2011, the total number of accounts having unclaimed deposits stood at 1.1 crores, with the total unclaimed amount being Rs. 2,442 crores. This reached to a whopping Rs. 46,222 Crores from 14.9 crore accounts by the end of 2023 marking a 13-fold increase in accounts and nearly 20-fold increase in the amount unclaimed. In terms of bank group-wise distribution, Public Sector Banks account for more than 80% of these unclaimed deposits while Private Sector Banks account for an average of 10%.
Further, on January 1, 2024, the RBI issued comprehensive revised guidelines for managing inoperative accounts and unclaimed deposits to address the growing volume of unclaimed deposits and facilitate their return to rightful owners or claimants.
Key updates in these guidelines include introducing a video-based customer identification process for reactivating dormant accounts, treating certain non-financial transactions and KYC updates as a customer-induced activity to keep accounts active, allowing account reactivation at any branch (including non-home branches) within a specified timeframe, and prohibiting debit transactions in dormant accounts unless activated by the customer.
Additionally, the RBI launched the Unclaimed Deposits Gateway to Access Information (UDGAM) portal to provide a streamlined platform for customers to track and reclaim their unclaimed deposits.