The report on “Trend and Progress of Banking In India’’ is an annual publication, which the RBI has to submit to the government in terms of the Banking Regulation Act 1949. The report is an authentic account of the developments in the financial sector. Although the latest report, submitted to the union finance ministry on November 21, covers the period 2012-13, its relevance today is in no way diminished. This is because policy issues encompass a larger time frame than any one financial year. Trends, whether say profitability or deposit growth do not normally change abruptly.

Commercial banks dominate the financial landscape, accounting for over half of the financial flows in the economy. That, however, is not to deny the importance of NBFCs and co-operative banks. The RBI report devotes one chapter to each of these.

What are the principal challenges facing banks? The domestic economy is slowing down while at the global level there is only a modest recovery. Regulatory initiatives over the past year sought to enhance the quality of risk-based supervision, better oversight over financial conglomerates and improved coordination among regulators. Banks are being equipped to face the challenges of financial inclusion.

More specifically, banks need to address certain key issues. Reduction in the level of NPAs is a primary task. Simultaneously loan recovery methods have to be improved upon and strengthened. Financial inclusion should be implemented in a sustainable way. For this suitable business and delivery models will have to be developed.

Competition among banks and with the rest of the financial sector will increase. New banks are proposed to be licensed shortly. There is a need for decisive changes in the banking structure to enable it to grow in size, resources efficiency and inclusivity.

Asset quality

Elaborating on just a few of the above, the RBI report points out that the asset quality of banks is an important indicator of their financial health. It also reflects on the efficacy of their credit risk management and recovery environment. Not surprisingly, the asset quality of banks decreased significantly during the year .The level of stressed assets (both NPAs as well as restructured assets) went up. Banks should strengthen their due diligence and also follow whatever guidelines the RBI and the Government have formulated to mitigate this pressing problem. Credit appraisal and post-loan monitoring are other crucial steps which need to be improved upon.

The report makes a number of suggestions to spruce up the loan recovery system. It should focus on fairness and efficiency and try to preserve the value of underlying assets and safeguard jobs. Credit data must be shared and large exposures across banks monitored closely. There is an urgent need for accelerating working of debt recovery tribunals and asset reconstruction companies.

Another area which will engage policy makers to a greater extent than now is strengthening the role of banks in inclusive development. Access to bank finance is still poor for many categories. They include the poor, rural and small and medium industries. Although recently a very large number of bank accounts have been opened, the actual number of transactions per account is still small, suggesting inadequacies on both demand and supply sides.

Financial literacy will create awareness of bank schemes and thereby enhance the access to the financial system. Increased use of technology should help in achieving the goal of financial inclusion.

A third point highlighted in the report relates to competition in the financial sector. One of the major objectives of financial sector reforms, competition is expected to bring in greater efficiency for banks and a wider choice of services and products for their customers. Two important recent developments here are the licensing of new private banks and announcing clear guidelines for foreign banks to set up shop in India or expand their footprint in India. Awarding licences to corporate houses (among others) remains a highly controversial idea.

The RBI report captures the major developments and policy issues that will dominate public discourse.