Relevance: GS-3 (Indian Economy – Banking, NPAs, Financial Stability); GS-2 (Governance – Regulation)
Source: PIB; RBI Financial Stability Report; Economic Survey

Context

India’s banking sector, once burdened by rising non-performing assets and governance failures, has undergone a decade-long structural clean-up. A recent PIB release highlights reforms aimed at strengthening transparency, resilience, digital safety and public trust in the banking system. Trust is crucial because banks remain the core channel for credit, savings mobilisation and economic growth.

State of the Banking Sector

India’s banking indicators have improved significantly:

• NPA ratio: Down to 3.2% in 2023–24, lowest in 10+ years.
• Capital Adequacy Ratio: Strong at 16.8%, above Basel-III norms.
• Profitability: Public Sector Banks returned to consistent profit since 2020.
• Credit Growth: Double-digit, led by services, MSMEs and retail.

Yet concerns persist—high unsecured personal loans, cyber threats, cooperative bank weaknesses and uneven credit access in rural areas.

Major Measures to Strengthen Trust

1. Balance Sheet Clean-up & Recapitalisation

• Government injected ₹3.19 lakh crore into banks (2017–2022).
• Prompt Corrective Action (PCA) improved discipline, reducing risky lending.

2. Insolvency and Bankruptcy Code (2016)

• Enabled recoveries worth ₹3 lakh crore.
• Improved lender confidence and borrower accountability.

3. Governance Reforms

• Strengthened bank boards, risk-management systems, and fit-and-proper norms.
• Streamlined merger of weak PSBs to build stronger balance sheets.

4. Financial Inclusion & Customer Protection

• Jan Dhan Yojana: 51 crore+ accounts, ₹2.1 lakh crore deposits.
• Unified Payments Interface (UPI): 1,000 crore+ monthly transactions.
• Integrated Ombudsman Scheme (2021): Single platform for grievance redressal.

5. Digital Trust & Cyber Security

• RBI’s Cyber Security Framework and continuous supervision.
• Guidelines for secure digital payments and data protection.

Remaining Structural Concerns

• Growing retail credit risks.
• Climate exposure of agricultural and MSME loans.
• Persistent governance gaps in cooperative banks.
• Need for deeper credit flow to small businesses and rural borrowers.

Way Forward

• Strengthen risk-based supervision, stress testing and cyber audits.
• Further autonomy for PSB boards.
• Expand financial literacy and fraud awareness.
• Build green-finance frameworks and rural credit infrastructure.
• Encourage diversified credit through fintech partnerships.

India’s banks are more stable today, but sustained trust requires governance reforms, digital safety, deeper inclusion and vigilant supervision. Trust is the true capital of the banking system—and it must be continually rebuilt.

Q. “What reforms have strengthened trust in India’s banking sector? Examine remaining challenges and the way forward for long-term financial stability.”