The monetary policy transmission of state-owned banks in the short-run is stronger than their counterparts in the private sector, and can be improved further with capital infusion, said a RBI working paper.
The credit channel of monetary policy transmission is robust in India and its efficacy can be reinforced by better capital position of banks, said the working paper on 'Asset Quality and Credit Channel of Monetary Policy Transmission in India: Some Evidence from Bank-level Data'.
"Controlling for asset quality, in the short-run, the credit channel of monetary transmission of public sector banks is stronger relative to that of private sector banks," it said.
The Reserve Bank of India said the views expressed in the paper are those of the authors and not of the central bank.
According to the paper, credit deceleration in India since 2013, in part, could be attributed to a gradual worsening of asset quality. Other factors contributing to the slowdown of credit growth include a slowdown in economic activity and deposits.
"However, the accommodative stance of monetary policy and reduction in the policy repo rate (starting from 2019) helped cushion the credit deceleration,"it said, adding that in the absence of a sharp cut in the policy repo rate, the slowdown in credit growth would have been far more severe.
The credit growth slowdown, the paper said, could have been bolstered to some extent if banks had maintained higher levels of capital position.
"Therefore, for monetary policy actions to have their full impact on the credit channel, it is imperative that the asset quality concerns of banks are addressed and that their capital positions are strengthened," the paper said.
It noted that since the early 2010s, asset quality of banks in India has worsened gradually, impacting their profitability.
Asset quality of scheduled commercial banks (SCBs), measured as a ratio of gross non-performing assets (GNPAs) to gross advances, deteriorated from 2.5 per cent in Q4 of 2010-11 to 9.1 per cent by Q4 of 2018-19, before marginally improving to 8.2 per cent in Q4 of 2019-20.
Profitability, measured by return on assets (RoA), declined from 1.1 per cent in Q4 of 2010-11 to (-) 0.09 per cent in Q4 of 2018-19, it said.