Banking

The Banking Sector Reveals the Middle Classes Aren’t Really Getting a ‘Bonanza’

The price for the NPAs of the big corporates is ultimately paid by the aam aadmi. Given that such huge provisions for the NPAs tie up a large portion of funds, it in effect limits the credit available for lending to key sectors like agriculture or MSMEs.

There is a euphoria around the “tax bonanza” offered to the middle classes in this year’s Budget. The proposal of no tax for those with annual income up to Rs 12 lakh has been hailed by the media, with many even calling this a “middle-class budget”. Of course, there are serious concerns as to whether the economy, in the pickle that it is, can be revived only with this relief for a tiny fraction of the middle classes, given that less than 2% of Indians seem to pay direct taxes. But that aside, what one finds amusing is the manner in which the middle classes respond to such moves. While a one-time deal like this creates cheer, egged on of course by the media, there is hardly any reaction to the holes burnt into middle-class pockets over time. Let’s look closely at the banking sector.

Middle classes form the bulk of depositors in the banks. It is these deposits that in turn form the bulk of the working capital that allows banks to operate. This year’s Economic Survey, in fact, rejoices in the double-digit growth in bank deposits. And yet, middle-class depositors have been shortchanged over the years by the dwindling interest rates on their savings bank deposits. “The interest on savings bank accounts, which was 5% in 1977, was brought down to 3.5% in 2003, and now it has come down to 2-2.5%,” says Thomas Franco, former general secretary of the All India Bank Officers Confederation. “If the middle classes were paid their fair share of interest at say 5%, they would have earned near about Rs 1.8 lakh crore more last year.”

This is far more than the Rs 1 lakh crore that the finance minister claims to have “foregone” with the tax rebate she bragged about. Fixed deposits account for nearly 60% of all bank deposits, and as per the Economic Survey, its share in bank deposits is growing. If one takes into account that the interest rates on FDs have nearly halved over the last two decades, the actual earnings foregone by the middle classes are massive. And yet, there seems to be a general acceptance of this as fait accompli.

Also read: Why the Union Budget 25-26 Doesn’t Spark Joy (or Growth and Consumption)

The real story behind disappearing NPAs

The Economic Survey released the day before the Budget, while evaluating the government’s performance in the banking sector, applauds the “consistent improvement” in the profitability of banks. It celebrates the fall in the Gross Non Performing Assets (GNPAs) to a “12-year low”. What the Economic Survey doesn’t not mention, however, is the scale of the massive write-offs being orchestrated backstage. The banks have written off a whopping Rs 16.5 lakh crore in bad loans over the last decade. In fact, Rs 1.69 lakh crore has been written off in 2024 alone! It is the public sector banks (PSBs) that have taken the major share of these write-offs and it is the corporates who account for the major share of these bad loans or NPAs. A deep dive into the Trend & Progress of Banking report and the Financial Stability Report released by the RBI at the end of 2024 give us a glimpse of the many tricks up the government’s sleeves.

One such trick to make these bad loans disappear is the creation of Asset Reconstruction Companies (ARCs), made so that banks could sell their bad debts and clean up the banks’ balance sheets. During 2023-24, out of the total bad loans (or GNPA), the share of bad loans sold to ARCs declined to 5.8% from 9.7% in the previous year. However, the share of PSBs and foreign banks has increased. In 2023-24, PSBs and foreign banks sold bad loans at significant discounts. The actual value of these loans remained much higher (orange bars in Figure 1.b) than the price paid by the ARCs to buy them (yellow bars).

Figure 1: Bad loans to ARCs

Now let’s look at the magic salons or the Insolvency and Bankruptcy Code (IBC). Despite being created to help banks recover assets from the insolvent companies, the actual results remain disappointing. The overall NPA recovery rate through different channels still hovers around 16% in 2023-24. When it comes to the IBC, while the number of cases referred to it rose from 704 in 2017-18 to 1,004 in 2023-24, the recovery rate plummeted from 50% to a mere 28.3%. And by the Economic Survey’s own admission, the haircuts in these magic salons still remain as high as 69%. So, for every Rs 100, the banks are bearing a loss of Rs 69!

Banks have to make arrangements to adjust these losses. They set aside money from their profits to cover for these potential losses from loans that may not be repaid (i.e. NPAs), for taxes on their profits, for risky investments, etc. This is called provisioning. According to the Financial Stability Report, by September 2024, banks were setting aside Rs 77 for every Rs 100 of expected losses. The orange bulge over the last decade in Figure 2 shows the sheer weight of provisioning just to cover for bad loans or the NPAs. Even now, out of the Rs 89,555 crore reserved for bad loans by the banks, the majority – Rs 60,714 crore – comes from PSBs which have a higher share of provisions for bad loans than private banks (see the green bars in Figure 3).

Figure 2: Year-wise provisions made by banks

Figure 3: Bank group wise provisions. Source: RBI, Stastical Tables Relating to Banks of India

Who bears the cost?

Now, many claim that these write-offs and provisions are simply an accounting exercise by the banks with no real consequence. But there are no free lunches, ever. The price for the NPAs of the big corporates is ultimately paid by the aam aadmi. Given that such huge provisions for the NPAs tie up a large portion of funds, it in effect limits the credit available for lending to key sectors like agriculture or MSMEs. Zico Dasgupta in his piece in the State of Finance in India report in fact demonstrates how the PSBs “could meet a lower proportion of the credit requirement of the MSMEs during the period of burgeoning NPAs”. The same would be the fate of marginal borrowers like farmers who struggle to secure necessary credit.

If one looks at the dipping red line in Figure 4, one can clearly see the repercussions in the form of the declining share of priority sector lending by the public sector banks, which has dropped from 33.8% in 2020-21 to 30.2% in 2023-24.

Figure 4: Priority sector lending. Source: RBI, Statistical Tables Relating to Banks of India

Adding to this disparity is the increasing reliance on Priority Sector Lending Certificates (PSLCs). These are certificates that the banks buy to just meet lending targets rather than directly giving credits to the priority sectors. The total trading volume of PSLCs grew by 25.5% in 2023-24, with Small and Marginal Farmers (PSLC-SMF) witnessing the highest demand (see the green bars in Figure 5), driving up its weighted average premium (i.e., the average price paid by banks to buy these certificates). This shows that the banks are merely complying with targets, instead of lending directly to small and marginal farmers.

Figure 5: Trading volume of PSLCs

Changing priorities

If one needs more clarity on the new priority of the banks these days, one just needs to look at the interest rates for loans. Over the years, the cost of borrowing (interest rates) for businesses like infrastructure, trade, industry and professional services has gone down significantly. If companies in these sectors had to pay 13% interest on loans in 2014, they now pay around 8-9%. However, for farmers, the interest rate on loans has stayed nearly the same at around 10%. They don’t seem to have benefited from lower borrowing costs like other industries have.

What the Economic Surveys will not tell us is that instead of serving as an instrument of redistribution of resources through credit support to the marginalised, the banks have been turned into a tool to precipitate inequality. They are designed now to draw from the bottom and aggrandise the coffers of those at the top.

Ahead of Budget, Rupee Slips to All-Time Low

Meanwhile, Bloomberg reports that the RBI has injected “$5.10 billion through a foreign-exchange swap auction,” to ease the severe cash crunch.

New Delhi: A day before the Union Budget is to be presented, the rupee slipped to an all-time low on January 31.

It was 86.65 against the dollar. Earlier in January, it had been 86.6475.

The 86-mark was held to be psychologically significant.

Its is like that new US president Donald Trump’s threats of trade tariffs on Canada and Mexico, and additional ones on China have weighed heavy.

Reuters has indeed reported that the dollar index was higher at 108.2 while most Asian currencies declined after Trump’s fresh warnings this weekend.

The news agency also quoted traders to say that state-run banks were spotted offering dollars, most likely on behalf of the Reserve Bank of India.

Meanwhile, Bloomberg reports that the RBI has injected “$5.10 billion through a foreign-exchange swap auction,” to ease the severe cash crunch.

According to the report, this is the first time in five years that the system has been used.

“The infusion takes the amount poured into India’s banking system to more than $7 billion in the past two days and is part of the Reserve Bank of India’s broader $18 billion plan to address the tightness in domestic money markets,” the report says.

The RBI accepted 28 bids, Business Standard reported, totalling $5.1 billion. The premium cut-off had been set at 96.81 paisa, slightly below the prevailing market level.

Indian Banks Recovered ~16% of the Rs 16.6 Lakh Cr. They Wrote Off From 2014 to 2024: RTI

Recovery rates have remained low across all banking sectors for which the RBI provided data.

New Delhi: Since April 1, 2014, Indian banks have written off loans worth Rs 16,61,310 crore, according to data from the RBI in response to a Right to Information (RTI) query by Prafful P. Sarda, a civil rights activist.

The data, which extends to September 30, 2024, shows that only Rs 2,69,795 crore of this amount has been recovered.

The RTI response breaks down the write-offs by bank category. Public sector banks led with write-offs of Rs 12,08,621 crore, followed by private sector banks at Rs 4,46,669 crore and urban cooperative banks at Rs 6,020 crore.

Recovery rates have remained low across all sectors. Public sector banks recovered Rs 2,16,547 crore, while private sector banks recovered Rs 53,248 crore.

The RBI noted that recovery data for urban cooperative banks was unavailable.

With Rs 13,91,515 crore still unrecovered, the overall recovery rate stands at roughly 16%.

Data from RTI response. Figures in Rs crore.

According to data disclosed by Union minister of state for finance Pankaj Chaudhary in response to a question in the Lok Sabha in November 2024, bank write-offs reached Rs 1.7 lakh crore in the financial year 2023-24 (FY24) – the lowest in five years after peaking at Rs 2.34 lakh crore in FY20.

Punjab National Bank, the Union Bank of India and the State Bank of India reported the highest write-offs among public sector banks, while HDFC Bank, Axis Bank and ICICI Bank led among private sector banks.

Though overall write-offs decreased in FY24, more than 20% of banks reported higher write-offs than the previous year.

The RBI explained that most write-offs occur for technical, prudential or collection-related reasons. Banks maintain the right to recover loans even after writing them off, as the process serves primarily as an accounting practice for balance sheet-management and tax efficiency. The write-off does not release borrowers from their repayment obligations.

But Sarda, who had filed the RTI query with the RBI, charged in a statement that in the absence of a prescribed time frame for the recovery of outstanding amounts, “lakhs of crores of public funds are lost for all practical purposes as the banks keep issuing rosy balance-sheets each year”.

He also said that in line with a 30-year-old RBI policy, it is banks and their boards of directors that handle all credit-related matters, decide recovery policy and determine the amounts that are to be recovered.

“In this scenario, will finance minister Nirmala Sitharaman announce stricter norms to pin accountability on lenders, right from the managers to the board of directors – and in case of NPAs [non-performing assets] – recover the lost amounts from the banks’ own executives for their lapses and poor judgement?” Sarda asked.

A separate RTI response from August 2024 indicated that banks have recovered just 18.7% of written-off loans in the past five years.

The RBI’s September 2024 figures remain provisional. The response excluded data from state cooperative banks and district central cooperative banks, as the RBI does not collect this information. All provided data comes from banks’ off-site returns.

This article was updated at 2:20 pm on January 28 with quotes from Sarda.

NPAs Can Increase by 25% in FY 25, 26 Due to Rising Stress Levels in Unsecured Retail Loans

Unsecured personal loans and credit card borrowings increased at 22 per cent and 25 per cent, respectively, in each of the past three years.

New Delhi: Increasing stress levels in unsecured retail loan books can create asset quality risks, resulting in non-performing assets going up by 25 per cent over the past fiscal’s level in the financial years 2025 and 2026.

International agency Fitch has warned that private sector banks such as HDFC Bank, Kotak Mahindra Bank and others have shown massive increase in their retail, agriculture and MFI books, in their declared earnings for the Q3, reported The New Indian Express.

“We forecast the banks’ impaired-loan ratio to fall by 40 bps to around 2.4 per cent for the current financial year and by another 20 bps next fiscal, despite expecting new bad loans in FY25 and FY26 to be around 25 per cent higher than in FY24” Fitch Ratings said in a report Thursday (January 23).

The agency added that growth in rapid retail lending in recent years has heightened medium-term risks.

Unsecured personal loans and credit card borrowings increased at 22 per cent and 25 per cent, respectively, in each of the past three years running up to FY24, but slowed to 11 per cent and 18 per cent, respectively in the first half of the current fiscal.

The development took place after the RBI hiked the risk weights attached to unsecured lending by 25 percentage points in November 2023.

What Kind of Budget Does India’s Banking Sector Need?

Banking reform advocate Thomas Franco dissects the government’s claims of a banking ‘turnaround,’ as highlighted in the last Economic Survey.

In the fourth episode of ‘Budget 2025: What’s at Stake?’, prominent social activist, banking reform advocate Thomas Franco dissects the government’s claims of a banking ‘turnaround,’ as highlighted in the last Economic Survey. Are declining non-performing assets, rising bank profits and increased financial inclusion as promising as they seem?

He also evaluates whether successive budgets have truly delivered on credit support for MSMEs, including MUDRA loans, during financial stress. Finally, Franco outlines what a credit-sensitive budget should prioritise, sharing key recommendations for strengthening the nation’s financial system.

This series is a collaboration between the Centre for Financial Accountability and The Wire.

What Are the Structural Reasons Behind the Rupee’s Fall?

It will be imperative for RBI to let go of currency inflexibility, and allow greater depreciation, thereby limiting liquidity tightness and ease the pressure on the economy.

The crash of the Indian rupee against the US dollar, an all-time low of 86.71, has surprised many. This is because until recently, the Reserve Bank of India (RBI) was hailed for dextrously managing financial stability, and maintaining a resilient financial system and robust macro-economic balance.

But now, the sentiment is turning less sanguine. The rupee has depreciated over 3.2% since September 2024 and more is in the offing. And it entwines with the Indian stock markets (NSE) losing Rs 60 trillion or 12.6% market cap since the end of September 2024. The conviction on Indian markets being insular to the vagaries of global impulses has waned.

What’s in store is rooted to both structural and cyclical factors chained to global and domestic impulses. The RBI tried to suppress it with an overtly interventionist currency intervention. But, as it unwinds in the face of renewed dollar rebound, the pace of depreciation could be higher than historical averages.

Our multi-dimensional framework, including models for the US dollar index and INR-USD indicate that the dollar can depreciate to 90-92 levels in the next six to 12 months; the bias is towards a higher and quicker depreciation.

From long-term perspective, the performance of the INR/USD is pro-cyclical, appreciating during cyclical up-turn (for example, 18% during 2002-2009) and depreciating during downturns. Indexed to 2008, the INR-USD has depreciated (90%) more than other currencies (38% dollar emerging markets index, and 21% AE dollar indices) because of the narrowing growth differential versus global.

A mercantilist approach

Trends since 1993 show structural depreciation during the downcycle rising to 7% YoY (year over year) with one standard deviation ordaining a range of 13% and 1%. However, since October 2022, the trend depreciation has mellowed to 4% and an annualised average depreciation of 0.5%, contributed by the suppression of volatility resulting from aggressive interventions by the RBI following the Ukraine-Russia war.

Also read: RBI Is Buffering Against Impending Volatility, Rate Easing Can Wait

Our currency inflexibility measure shows that while at 0.38, the Chinese Yuan is increasingly getting flexible, INR close to ~1 is mimicking a peg [0 represents a fully flexible currency and 1 represents currency peg].

This mercantilist approach is contrary to RBI’s de-jure position that the rupee is a managed float, with interventions utilised only for the purpose of managing large volatility. Since October 2024, RBI’s foreign currency assets (FCA) declined by US $ 47 billion, leading to a drain of Rs 4 trillion of domestic liquidity drain. This in turn led to a deficit liquidity situation notwithstanding the 50-basis point cash reserve ratio cuts and collateralised lending against government securities by RBI.

But this position is becoming untenable as the rapid strengthening of dollar is accentuating the misalignment. An aggressive rundown of forex reserves may reduce RBI’s ability to control markets, leading to speculative currency attacks.

‘Growth’ story

On the domestic front, the discord between the perceived growth and actual situation is converging with the successive downscaling of growth projections by RBI and the Central Statistical Office from 7.2% to the latest 6.4%. The shift in narrative has manifested from the vocal concerns from Indian corporates over the shrinking middle class, and the inability to associate with the official claims of robust growth.

But earlier, demand slackness manifested in prolonged weakness in rural demand, even as the truncated post-pandemic rebound in urban demand and leveraged consumption camouflaged persistent household fragility. Receding productivity at the broader level is demonstrated in rising ruralisation, increased dependence of workers on agriculture, contracting real income per worker, declining value addition in the unorganised sector and eroding household savings. These glaring symptoms were overlooked in the official and consensus assessments. Thus, any downside surprises can expose the rupee to greater vulnerability.

The 10% resurge in the US dollar index since September 2024 aligns with the US economy emerging stronger than expected, forcing the US Fed to scale back two out the guided four rate cuts in 2025. With Trump 2.0, the impact of his expansionary impact of corporate tax cuts and tariff hikes could be elevated inflation and the US Feds remaining hawkish.

What has bolstered the US dollar valuation matrix is the widening growth divergences with eurozone that continues to face persistent economic challenges.

Further, China has been running down its dollar reserves while also adopting greater currency flexibility to counter slowdown and the prospective impact of Trump 2.0 mercantilism. This will have a bearing on the dollar emerging markets (EM) index. And the added sliver is the surging geo-political risks inducing increased global policy uncertainty.

An investment plan

As these global and domestic impulses pan out, the capital flows into EMs and India, including portfolio flows, FDI and external commercial borrowings, can see increased volatility. A modest 8.3% YoY return from the benchmark India equity indices, Nifty, and Sensex, is significantly lower than 26% from US S&P 500. And with a 3% INR/USD depreciation, the underperformance is starker. Pervasive demand weakness and margin pressure forebode further moderation even for the coming years. Consensus Nifty earnings-per-share growth for FY25-FY27 is placed at 11% compound annual growth rate. These compared weaker than the projected earnings for US S&P 500. A relatively lower price/earnings to growth ratio for the US markets may continue to impact foreign institutional investor flows.

How RBI and the government respond to the impending rupee weakening will demonstrate the expanse of policy options. To us it appears limited as the landscape, including monetary policy, fiscal headroom, peak credit-deposit ratio of banks, rising retail defaults and languid private capex, is muddled with multiple constraints. The RBI’s currency inflexibility may have been motivated by the desire to sustain a façade of macro-financial robustness, but it has constricted growth.

Thus, it will be imperative for the RBI to let go of currency inflexibility, and allow greater depreciation, thereby limiting liquidity tightness and ease the pressure on the economy. The attempts to limit the imbalances in the banking system, to contain reckless retail lending, can be hastened. As the real policy rate differential of India versus the US Fed rate is negative, the RBI’s window to ease policy rate is narrow. This is specially so as the US Fed has rolled back two out of four cuts guided earlier for 2025; in fact, there are chances that the US rate cut cycle can just halt. In any case, given the structural underpinnings, monetary easing by the RBI will largely be futile from the growth standpoint.

Given the rising traction in NRI deposits, in response to outward migration and easing of statutory requirement on NRI deposits, there is a high possibility of falling back on an NRI deposit scheme of the type mobilised in the aftermath of the Taper Tantrum in 2013.

Dhananjay Sinha is co-head of Equities and head of Research of Strategy and Economics at Systematix Group.

Microfinance Loan Slippages Could Affect Banks in Q3

Microfinance delinquencies will likely peak in the first half of FY25, a report said.

New Delhi: The third quarter of the 2024-2025 financial year is likely to see a dent in banks’ earnings due to slippages from unsecured loans, mainly in the microfinance sector.

A slippage happens when a borrower does not pay an agreed-upon amount towards resolving their bank loan for 90 days and it becomes a non-performing asset.

Financial Express has reported on the basis of quotes from experts that slippages and overdue loans are likely to affect microfinance lenders particularly. Microfinance delinquencies will likely peak in the first half of FY25.

According to bankers, delinquencies in microfinance loans have surged in Bihar, Tamil Nadu, Uttar Pradesh, and Odisha, which together account for nearly two-thirds of the incremental bad loans, the report said.

Experts have blamed challenges in deposit mobilisation and low corporate credit growth. However, it is also true – based on numerous ground reports, including by The Wire – how microfinance lending has brought the poorest of Indians to a dire state of helplessness.

“Unsecured loans, including credit cards, would also see higher slippage quarter-on-quarter (QoQ). But vehicle finance, housing finance, mid and large corporates and secured retail appear safe,” a report by Nuvama Institutional Equities is quoted as having said.

Indian Express has additionally held that some lenders may see some worsening of asset quality driven by a rise in slippages in the agriculture sector too.

Signs of stress in the banking system are showing as several banks are looking to sell their bad loans.

Private lender IndusInd Bank Ltd said late last year that it has invited bids on a 100% cash basis to offload its non-performing microfinance loan pool of 10.6 lakh retail loan accounts amounting to Rs 1,573 crore.

Utkarsh Small Finance Bank also announced a similar plan to sell off NPAs of around Rs 355 crore to an asset reconstruction company at a reserve price of Rs 52 crore. Its share value jumped 4% after this.

The small finance bank Ujjivan Small Finance’s shares jumped 8.7% in November 2024 after it completed the sale of a stressed loan portfolio worth Rs 270.35 crore.

Rupee Hits Record Low Despite RBI Intervention

Equity markets mirrored the currency’s struggles, with the benchmark BSE Sensex and Nifty 50 indices closing down 1.6% each.

New Delhi: The rupee fell to an all-time low on Monday, December 6, pressured by a robust US dollar and weak capital inflows amid concerns over slowing economic growth. The currency slid to 85.84 against the US dollar, marginally surpassing its previous record low of 85.8075 reached in late December.

The rupee ended the trading session at 85.8275, marking a 0.1% decline for the day. Persistent dollar demand and bearish sentiment around the rupee kept it under pressure, despite intervention by the Reserve Bank of India (RBI), which helped prevent further losses, according to a Reuters report.

“It seems like the RBI will hold it (USD/INR) below 86 before (Donald) Trump’s inauguration later in January,” a trader from a foreign bank told Reuters.

Globally, the dollar index eased 0.3% to 108.5, retreating from a two-year high. However, the slight dip in the dollar index provided little relief for the rupee, as strong dollar bids in the local spot market and the non-deliverable forward (NDF) market continued to weigh heavily.

The spot market is where financial instruments such as commodities, currencies and securities are traded for immediate delivery. NDF, on the other hand, is a two-party currency derivatives contract to exchange cash flows between the NDF and prevailing spot rates.

Also read: Amid Pressure From Yuan Decline and Dollar Rally, Rupee Closes at Record Low of 85.77: Report

“The proximity to Trump’s inauguration and the strong underlying narrative of a hawkish Fed may well keep any USD correction short-lived,” ING Bank noted in a research update. The bank maintained its target of 110 for the dollar index in the coming weeks.

The rupee’s decline was further exacerbated by dollar demand from foreign banks, reportedly acting on behalf of custodial clients.

Equity markets mirrored the currency’s struggles, with the benchmark BSE Sensex and Nifty 50 indices closing down 1.6% each. Foreign investors have offloaded $1.1 billion worth of Indian stocks and bonds on a net basis so far this month, as per stock depository data.

How Stalled Projects, Cost Overruns and Delays in Policy Approvals Fuel the NPA Crisis

This is the second part of a two-part series outlining the nature of macroeconomic and financial challenges in front of the new RBI governor, Sanjay Malhotra. Read the first part here.

In addition to some of the macroeconomic issues highlighted in the earlier part, the new Reserve Bank of India (RBI) governor may need to also closely observe India’s banking sector which has wrestled with the challenge of Non-Performing Assets (NPAs) for over a decade and a half now. While overall NPA levels have improved in recent years, thanks to increasing write offs (which present its own set of challenges-discussed here), much of the financial data reveals that much of the burden continues to rest on Public Sector Banks (PSBs).

Simultaneously, sectoral challenges seen in agriculture, MSMEs, and manufacturing highlight systemic weaknesses, which, if left unaddressed, could jeopardise long-term financial stability and keep India’s growth cycle at a sub-optimal level. The observed trends, particularly between 2019-20 and 2022-23, reflect both progress and the need for targeted policy interventions.

According to data from the RBI annual report, PSBs saw their gross NPAs decline significantly from Rs 6.78 lakh crore in 2019-20 to Rs 4.35 lakh crore in 2022-23, reflecting efforts like recapitalisation, asset resolution, and stricter lending guidelines. Meanwhile, Private Sector Banks (PVBs) reported a more modest decline, with gross NPAs falling from Rs 1.83 lakh crore to Rs 1.15 lakh crore during the same period. This difference underscores the systemic weaknesses in public banks, which have historically been more exposed to priority sector loans and large-scale corporate lending.

While the decline in NPAs signals improvement, challenges persist, especially in agriculture, MSMEs, and manufacturing. The sharp rise in NPAs for Small Finance Banks (SFBs) – from Rs 1,709 crore in 2019-20 to Rs 8,869 crore in 2022-23 – further reflects the growing stress in niche financial institutions, which cater predominantly to small borrowers.

Agriculture: Persistent Stress Despite Loan Waivers

Agriculture, a critical component of India’s economy, continues to face rising NPA levels, particularly in PSBs. Between 2019-20 and 2022-23, agricultural NPAs in PSBs increased from Rs 1.11 lakh crore to Rs 1.14 lakh crore. This modest increase masks underlying structural challenges such as loan waivers, price volatility, and inadequate insurance mechanisms. While farm loan waivers provide short-term relief, they erode repayment discipline and weaken bank balance sheets.

Source: Author’s Calculations | RBI Statistics

The government has introduced initiatives like the Pradhan Mantri Fasal Bima Yojana and PM-Kisan Samman Nidhi to address financial stress in the agriculture sector. However, systemic issues remain. According to an analysis by The Hindu market access, coupled with uneven credit distribution, continues to exacerbate defaults. To address agricultural NPAs, policy solutions must go beyond loan waivers, focusing instead on improving crop insurance, stabilising prices, and enhancing rural infrastructure.

MSMEs: Falling NPAs but continued credit crunch

The MSME sector, which contributes nearly 30% of India’s GDP and provides employment to millions, showed a decline in NPAs between 2019-20 and 2022-23. Public Sector Banks reported a reduction from Rs 90,769 crore to Rs 80,577 crore during this period. This improvement can be attributed to targeted government interventions such as the Emergency Credit Line Guarantee Scheme (ECLGS), launched to support MSMEs during the pandemic.

Source: Author’s Calculations | RBI Statistics

Despite this progress, MSMEs continue to face systemic challenges. According to Economic Times, MSMEs struggle with limited working capital, delayed payments from large corporations, and slow demand recovery post-pandemic. While the introduction of the Udyam registration portal has brought many MSMEs into the formal credit system, a significant gap remains in access to timely and affordable credit.

The pandemic exacerbated financial stress for small businesses, and while restructuring programs have provided temporary relief, the long-term solution lies in improving cash flows, ensuring faster payment settlements, and providing targeted credit guarantees to MSMEs.

Manufacturing: The Largest Contributor to NPAs

The manufacturing sector remains the largest contributor to NPAs in India, particularly in PSBs. Over the years, large corporate defaults have continued to plague the sector, with companies like Bhushan Power and Steel defaulting on loans exceeding Rs 41,400 crore. Similarly, firms in the power sector, such as KSK Mahanadi Power Company, owed over Rs 21,390 crore, reflecting systemic failures in risk assessment, project implementation, and recovery mechanisms.

Source: Author’s Calculations | RBI Statistics

The manufacturing sector’s NPA crisis is closely tied to stalled projects, cost overruns, and delays in policy approvals. The power sector, for example, has suffered from weak demand and low capacity utilisation, rendering many projects unviable.

The Insolvency and Bankruptcy Code (IBC), introduced in 2016, was designed to streamline the resolution of stressed assets. While the IBC has improved recovery rates, delays in the insolvency process continue to limit its effectiveness. According to the Insolvency and Bankruptcy Board of India (IBBI), the average recovery rate under the IBC stands at 30-35%, leaving banks with substantial losses.

Private Banks vs Public Banks: A tale of two strategies

The contrasting trends between PSBs and PVBs highlight differences in their lending practices and risk management strategies. While PSBs remain heavily exposed to priority sectors and large industrial loans, private banks have focused more on retail lending and small businesses, which carry lower default risks. This difference is reflected in the NPA data:

Graph of public bank versus private bank npa crisis

Source: Author’s Calculations | RBI Statistics

Public Sector Banks: Declined from Rs 6.78 lakh crore in 2019-20 to Rs 4.35 lakh crore in 2022-23.
Private Sector Banks: Reduced NPAs from Rs 1.83 lakh crore to Rs 1.15 lakh crore during the same period.

The ability of private banks to maintain lower NPA levels highlights their focus on better risk assessment, stricter credit discipline, and higher recovery rates. In contrast, PSBs, which are more exposed to politically sensitive sectors like agriculture and large-scale manufacturing, face greater systemic challenges.

SFBs, which cater to underserved and small borrowers, have seen a sharp rise in NPAs, jumping from Rs 1,709 crore in 2019-20 to Rs 8,869 crore in 2022-23.

Source: Author’s Calculations | RBI Statistics

The surge in defaults reflects the economic vulnerability of small borrowers, particularly during the pandemic. While SFBs play a crucial role in financial inclusion, their rising NPAs highlight the need for stronger borrower assessment frameworks and risk management practices.

Addressing the chronic NPA challenge

India’s NPA problem has undoubtedly improved in recent years, but the data highlights persistent sectoral vulnerabilities. The manufacturing sector, with its large-scale defaults and stalled projects, remains the single largest contributor to NPAs. Meanwhile, agriculture and MSMEs, which are critical to India’s economy, continue to face financial stress, particularly in PSBs. The rise in NPAs for SFBs further underscores the need for a robust credit assessment framework.

Also read: Narendra Modi’s Mammoth Bank Heist Over the Last 10 Years

Resolving India’s NPA crisis requires a multi-pronged approach – strengthening the Insolvency and Bankruptcy Code to expedite recoveries, improving risk assessment practices, and ensuring greater accountability in loan write-offs are essential steps. For sectors like agriculture and MSMEs, targeted policy measures – including better price stabilisation, timely payments, and credit guarantees – can help address structural weaknesses.

While the decline in NPAs among private banks signals progress, PSBs, at the direction of the RBI, must implement stricter credit discipline and project monitoring mechanisms to reduce their exposure to risky loans. Greater transparency in the increasing trend of loan write-offs and a focus on recovering dues from large defaulters will be key to restoring confidence in India’s banking system.

Deepanshu Mohan is a professor of economics, dean, IDEAS, and director, Centre for New Economics Studies. He is a visiting professor at the London School of Economics and an academic visiting fellow at AMES at the University of Oxford.

Aryan Govindakrishnan is a senior research analyst with Centre for New Economics Studies (CNES), O.P. Jindal Global University.

Rupee Hits New Low, Closes in on 86/$: Report

The rupee experienced its steepest intraday decline since March 2023 on Friday, December 27, falling to an all-time low of 85.80 against the US dollar before recovering slightly to close at 85.53, according to an Economic Times report.

New Delhi: The rupee experienced its steepest intraday decline since March 2023 on Friday, December 27, falling to an all-time low of 85.80 against the US dollar before recovering slightly to close at 85.53. This marked its lowest closing level ever and the eighth consecutive trading day of fresh lows, according to a report in the Economic Times.

Market analysts attributed the decline to domestic factors, including currency futures settlement and month-end demand for dollars from importers.

Domestic factors drive decline

“The steep fall was not driven by global triggers but rather by domestic factors,” VRC Reddy, head of treasury at Karur Vysya Bank, told the Economic Times. “As it was the settlement day for currency futures and the non-deliverable forwards markets, the rollover of positions led to significant dollar buying, particularly during the USD-INR fixing window.”

Additionally, customary month-end demand from importers settling bills in foreign currency amplified the pressure on the rupee. “This pressure was further amplified by heightened month-end dollar demand, stop-loss triggers in trader positions and initially limited intervention by the regulator,” Reddy added.

RBI intervention limited

Despite the RBI’s usual focus on exchange-rate stability, its intervention on Friday appeared subdued. “The RBI did not intervene in the morning and later we saw intervention when the rupee touched 85.80 levels,” Dilip Parmar, currency analyst at HDFC Securities, told the Economic Times.

Dealers noted the rupee depreciated steadily, losing 5 paise every 30 minutes in early trade. The currency opened at 85.31, hit an intraday low of 85.80, and eventually settled 0.3% lower than Thursday’s close of 85.26.

Also read: India’s Trade Deficit Swells to Record $37.8 Billion in November

Overvaluation concerns

Market analysts are of the view that the rupee remains overvalued by approximately 8% against a basket of 40 currencies based on the real effective exchange rate (REER). RBI data for November showed the rupee’s REER had risen to 108.14, up from 107.20 in October.

“Hence, there remains scope for further weakness to maintain export competitiveness. I expect the RBI intervention policy to be shallow and they may have to allow further rupee depreciation,” Kunal Sodhani, foreign exchange treasury executive at Shinhan Bank India, told the Economic Times.

Outlook for 2025

The rupee’s depreciation is in sync with broader trends among Asian currencies, which have weakened by over 2.5% since November, compared to the 1.39% decline of the rupee. Analysts predict further weakening of the rupee in the coming months, possibly breaching the 86-mark by the next quarter.

Traders are also eyeing geopolitical developments, including the inauguration of US President-elect Donald Trump in January, the Union budget and the monetary policy committee’s measures in February as key factors influencing the currency’s trajectory.

“The rupee must depreciate if the RBI wants to maintain its competitiveness. Plus, in REER terms, the Indian currency is overvalued,” Parmar added. “I think 2025 will be a year of volatility due to uncertainties from Trump’s administration.”

The RBI’s forex reserves have already seen a reduction of $60 billion since September.

It is interesting to note what Prime Minister Narendra Modi had said when the rupee fell during former Prime Minister Late Manmohan Singh’s tenure.

“The rupee is in the hospital and is admitted to the ICU,” Modi had said at an event in 2013.

On August 20, 2013, when the rupee had hit a then record low, Modi said, “In the last three months, even with the pace at which the rupee is falling the government is not doing anything. Once the rupee keeps falling, the world powers take full advantage of it; the government has totally failed to stop that.”

At another event on July 30, 2013, Modi said, “Today, the speed at which the value of rupee is falling, at times it seems that there is competition going on between the government in Delhi and the rupee on whose value is falling faster. When the country became independent, $1 was equal to Re 1. One dollar was sold for one rupee. When Atal ji’s government was there, when Atal ji formed the government for the first time, the value of rupee had reached Rs 42 and when Atal ji left it reached 44, there was a difference of 4 per cent. But this government has brought it to Rs 60.”

The video of that speech is still available on Modi’s YouTube channel.

On July 14, 2013, Modi had posted on X (formerly Twitter): “Rupee is not losing strength because its size has changed. It is because those sitting in Delhi are busy in corruption: Modi ji.”