Banking Sector Shines with 6th Year of Profit Growth in FY24

Indian commercial banks achieved a 6th consecutive year of profit growth in 2023-24, with bad loans continuing to decline, as highlighted in the Reserve Bank of India’s (RBI) annual report, Trends and Progress of Banking in India.

Profitability Trends

Banks’ profitability improved further, with the return on assets (RoA) reaching 1.4% and the return on equity (RoE) rising to 14.6% in FY24. However, rising interest rates caused banks to increase deposit rates to bridge the credit-deposit growth gap, slowing operating and net profit growth. The ratio of interest expenses to interest income climbed to 57.4% in FY24, up from 52.2% in the previous year.

Capital Adequacy and Costs

The capital adequacy ratio (CAR) decreased slightly to 16.9% by March 2024 due to an increase in risk-weighted assets (RWAs). CAR improved to 16.8% by September, staying above the regulatory minimum of 11.5%. Tier-I capital stood at 14.8% as of March 2024.

Balance Sheet Expansion

The consolidated balance sheet of scheduled commercial banks (SCBs), excluding regional rural banks, grew by 15.5% in FY24, driven partly by the HDFC-HDFC Bank merger. Private banks gained a larger share of the balance sheet, rising to 37.5% from 34.7%, while public sector banks (PSBs) saw their share decline to 55.2%.

Improved Asset Quality

Gross non-performing assets (GNPAs) fell by 15.9% year-on-year to ₹4.8 trillion, reducing the GNPA ratio to a 13-year low of 2.7% in March 2024 from 3.9% a year earlier. The net NPA (NNPA) ratio dropped to a decade-low of 0.62% in March 2024 and further improved to 0.57% by September.

Sectoral Insights

• The agricultural sector had the highest GNPA ratio (6.2%), while retail loans had the lowest (1.2%) as of September 2024.
• The GNPA ratio for the industrial sector continued its decline, reaching 2.9% by September.

Recovery and Upgrades

About 44.4% of the NPA reduction in FY24 was attributed to better recoveries and upgrades. The trend of improving asset quality began in FY19 and has continued since.

Banks remain well-capitalised and resilient despite rising costs, supported by strong recoveries and improved risk management.

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