The RBI has changed the way it approached supervision in the past. Having seen a couple of collapses in the NBFC sector and the near-collapse of a few banks, it is focusing on regular drills to prevent a fire from breaking out, explains Tamal Bandyopadhyay.
Let's look back at how 2024 was for India's financial sector.
The policy rate remained unchanged at 6.5 per cent through the year. The last two meetings of the Reserve Bank of India's monetary policy committee, in October and December, however, saw some action as the growth-inflation dynamics started changing.
In October, the RBI changed the stance of the policy from 'withdrawal of accommodation' to 'neutral', and followed it up in December with a cut in banks' cash reserve ratio to release liquidity in the system.
Before we get into the trends of the year gone by, here are some data points to ponder over.
Consumer price index (CPI) inflation was 5.69 per cent in December 2023. In January 2024, it dropped to 5.10 per cent and by July, it dropped further to 3.6 per cent -- the second lowest level in the last five years, and lower than the midpoint of RBI's flexible inflation target.
However, driven by food prices, it rose to 6.2 per cent in October, its 14-month high, piercing the upper band on the target. In November, it was 5.47 per cent.
The GDP growth has progressively slowed. From 7.76 per cent in the March quarter, real GDP growth dropped to 6.5 per cent in the June quarter and 5.36 per cent in the September quarter - the third consecutive quarter of slower growth for the world's fastest growing major economy.
What about other metrics, which give us a sense of the Indian economy, banking and finance?
Well, the closing of the 10-year yield in 2023 was 7.17 per cent. December 20, it was 38 basis points lower, closing at 6.79 per cent. During the year, the yield rose to a maximum of 7.245 per cent (on April 22), and its lowest level was 6.65 per cent (December 16).
One basis point is a hundredth of a percentage point.
Yields and prices of bonds move in opposite directions.
In 2024, the US 10-year yield moved from 3.88 per cent to 4.55 per cent, narrowing the spread between Indian and US 10-year bond yields to 224 bps from 330 bps in December 2023.
At this point, the spread is close to a two-decade low. This is a disincentive for foreign investors.
How has the rupee-dollar exchange rate been? The Indian currency closed at 83.21 a dollar last year. Its strongest level this year was 82.76 a dollar (March 11) and the weakest closing level was 85.02 (December 20).
The average level of the rupee vis-a-vis the dollar for the year till now is 83.64.
On the last Friday of 2023, India's foreign exchange reserves were to the tune of $623 billion. By September 27, 2004 the reserves reached their peak, at $704.9 billion.
Since then, it has been a one-way street, with the reserves dropping to $652.9 billion by December 13 as the RBI has been selling dollars to iron out volatility in the foreign exchange market.
The closing level of Nifty 50 last year was 21,731. Last fortnight, it closed at 23,587. The highest and lowest levels of the stock market index during the current year so far have been 26,277 (September 27) and 21,137 (January 24), respectively.
The Brent Crude price had closed at $77.04 a barrel in December last year. It peaked at $92.18 a barrel on April 12, 2024 and closed at around $72.50 last week.
Its lowest level was seen on September 10 -- $68.68.
The credit portfolio of the banking system was Rs 159.6 trillion by the end of last year. By November 29, 2024, it reached Rs 175 trillion.
The deposit portfolio has grown from Rs 200.8 trillion to Rs 220 trillion during this time.
There has been a sharp drop in the growth of both deposit and loan portfolios of the banking sector this year.
Finally, let's look at the health of the financial system.
The gross non-performing assets (NPAs) of the banking system, which stood at 3.2 per cent in September 2023, dropped further to 2.8 per cent in March 2024.
After provisioning, the net NPAs dropped from 0.8 per cent to 0.6 per cent during this period. The capital adequacy ratio, meanwhile, remained unchanged at 16.8 per cent.
Meanwhile, the gross NPAs of the non-banking financial companies (NBFCs) dropped from 4.6 per cent to 4 per cent, and return on assets rose from 2.9 per cent to 3.3 per cent.
There was a marginal drop in their capital adequacy ratio, from 27.6 per cent to 26.6 per cent.
The overarching theme of 2024 seems to be the RBI's new approach to vigilance. The hawk-eyed banking regulator has been on high alert against those who haven't been following the rules of the game in letter and spirit.
Keeping the customers' interests at heart, the RBI is pretty democratic in its approach.
While taking action, it has not discriminated -- both big and not-so-big entities have been dealt with in a similar fashion.
It has taught the right lesson to the peer-to-peer (P2P) lending platforms, which were behaving like deposit-taking NBFCs.
Some of them were also running collective investment schemes, where a pool of money was created with subscriptions from different lenders and loans were extended to a string of borrowers.
The regulator had to step in after it found that the P2P lending platform, instead of acting as intermediaries, were packaging loans as investment products and offering liquidity options, among other violations of the norm.
No one will be surprised if India's P2P market goes the China way.
Between 2007 and 2020, China's P2P market -- where the players deviated from the role of information intermediary to become shadow banks, offering principal guarantee -- went from boom to bust.
In the not-so-distant past, the RBI had taken action against India's largest private bank, a very large public sector bank, an upper layer NBFC and a few others, barring them from onboarding new customers for certain products.
In 2024, the banking regular carried on with the clean-up mission with renewed zeal.
In April, it barred a large private bank from onboarding new customers through its online and mobile banking channels, and issuing fresh credit cards.
March 15 was the last day of a payments bank.
Ahead of that, in the first week of March, the RBI imposed an embargo on a gold loan company, citing multiple supervisory concerns.
The RBI also directed a systemically important non-deposit taking NBFC to 'cease and desist' from doing any form of financing against shares and debentures.
A similar order was passed against four NBFCs in October, barring them from sanctioning and disbursing fresh loans.
'Usurious pricing' apart, the RBI found that these NBFCs were not complying with regulatory guidelines on the assessment of household income and the borrowers' ability to service the monthly instalment of loans.
Among other deviations, they also seemed to have indulged in 'evergreening' of loans -- the practice of giving fresh loans to pay off earlier ones.
For certain entities, the RBI has already reviewed its orders and allowed them to resume business; others are awaiting a reprieve.
It's clear that the regulator has changed the way it approached supervision in the past.
Having seen a couple of collapses in the NBFC sector and the near-collapse of a few banks, it is focusing on regular drills to prevent a fire from breaking out.
Will this trend continue this year? Will we see a rate cut in February? And if that happens, how deep or shallow will the cycle be?
Let's wait to watch how the new governor at the RBI prioritises his challenges.
A very happy New Year!
Tamal Bandyopadhyay is an author and senior advisor to the Jana Small Finance Bank Ltd. His latest book is Roller Coaster: An Affair with Banking.
Disclaimer: These are Tamal Bandyopadhyay's personal views.
Feature Presentation: Aslam Hunani/Rediff.com
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