By Swati Bhat and Nupur Anand
MUMBAI (Reuters) - Indian banks need to bolster their capital to absorb potential stress and augment credit flow when policy support is phased out, the Reserve Bank of India said in a report on Trends and Progress of Banking on Tuesday.
"Credit growth is muted, indicative of pandemic scarring on aggregate demand as also risk aversion of banks. Banks' asset quality may get dented, going forward," the RBI said.
Due to the pandemic, credit growth of commercial banks had been subdued in 2020/21 but non-banking finance companies filled up the space, RBI said.
However, though there was an uptick in bank credit growth in the first half of 2021/22, concerns are emerging over NBFCs' asset quality.
"Going forward, the sector may have to grapple with higher delinquency as and when policy measures unwind," the RBI said.
NBFCs also need to be better equipped and focused on cyber fraud prevention as customers' adoption of digital lending gathers pace, it added.
As the economy revives, renewed focus may need to be placed on building up adequate buffers and being vigilant of evolving risks, the report said.
During 2020/21, the total reported number of fraud cases declined while in the first half of 2021/22, private sector banks accounted for more than half the reported fraud cases.
The central bank said banks need to prioritise upgrading their IT infrastructure, improving customer services and strengthening cybersecurity.
Gross non-performing assets (GNPA) ratio of commercial banks declined to 6.9% as of end-September compared to 7.3% at end-March.
Banks return on assets (RoA) also improved to 0.7% at end-March compared to 0.2% a year ago, aided by stable income and a decline in expenditure.
RBI said overall the capital position of banks has improved aided by recapitalisation by the government as well as the raising of funds from the market.
"Nonetheless, incipient stress remains in the form of increased proportion of restructured advances and the possibility of higher slippages arising from sectors that were relatively more exposed to the pandemic," RBI said.
(Editing by Bernadette Baum)