The performance of the Indian banking sector improved in 2019-2020 with banks reporting a profit on an aggregate basis after two years of continuous losses, according to an RBI report released on Tuesday.

Bad loans on the books of Indian banks have eased with gross non-performing assets falling to 7.5% of total advances at the end of September 2020 from 9.1% in March, but the report said that going forward such loans could rise again following relaxations being lifted.

The six-month loan moratorium on repayments and the Supreme Court judgment prohibiting recognition of bad loans since September may have also provided some respite to the banks on asset quality. The central bank has introduced various measures to support the banking sector including a relaxation in recognition and provisions for bad loans to protect lenders and creditors during the coronavirus pandemic. The roll back of these measures could now hit the books of banks.

“The challenge is to rewind various relaxations in a timely manner, reining in loan impairment and adequate capital infusion for a healthy banking sector,” the RBI said it in its annual report on Trends and Progress of Banking in India.

India’s financial sector should brace for challenging times ahead with an increased risk of deterioration in asset quality and lower demand for loans, the report on Tuesday.

Non-banking financial companies (NBFCs) or shadow banks may see a hit  on their profitability going forward due to asset quality concerns, lower credit demand and the tendency to preserve cash, the report
said.

Concerns still remain on non-performing assets, particularly on credit card loans which does not augur well for the risk-profile of Indian banks.

“Given the uncertainty induced by COVID-19 and its real economic impact, the asset quality of the banking system may deteriorate sharply going forward,” the RBI said.

The report also said Indian banks had written-off loans worth Rs 2.38 lakh crore in the financial year 2020 that ended on March 31. The overall outlook for the Indian economy in 2021 continues to remain
uncertain, the report said.

“The high debt overhang of households, non-financial corporates and the Central and state governments remains a serious concern,” the central bank said..