Banks’ gross NPAs at record low with expectation of further fall

The gross non-performing assets (NPAs) of commercial banks have decreased to twelve-year low of 2.8 percent in March 2024 and may decrease further to 2.5 percent by the end of the current fiscal year, according to the Reserve Bank of India’s (RBI) Financial Stability Report (FSR).

The gross non-performing assets (GNPA) ratio of Scheduled Commercial Banks (SCBs) fell to 2.8 percent, while the net non-performing assets (NNPA) ratio decreased to 0.6 percent at the end of March 2024. “The asset quality of SCBs recorded sustained improvement, with their GNPA ratio moderating to a 12-year low in March 2024. The NNPA ratio also improved to a record low,” stated the June FSR.

Among bank groups, public sector banks (PSBs) saw a substantial reduction (76 basis points) in their GNPA ratio during the second half of 2023-24. The GNPA stock decreased across all bank groups, and proactive provisioning by PSBs and foreign banks (FBs) led to an improved provisioning coverage ratio (PCR) in March 2024, the report said. The half-yearly slippage ratio, which measures new NPA accretions as a share of standard advances, decreased across bank groups.

While the amount of write-offs declined during the year, the write-off ratio remained almost at the same level as a year ago due to a reduction in the GNPA stock, the FSR noted. The sustained reduction in the GNPA ratio since March 2020 has been primarily due to a persistent decline in new NPA accretions and increased write-offs. The RBI’s macro stress tests assess the resilience of SCBs’ balance sheets to unforeseen shocks from the macroeconomic environment.

These tests evaluate capital ratios over a one-year horizon under baseline and two adverse (medium and severe) scenarios. “The GNPA ratio of all SCBs may improve to 2.5 percent by March 2025 under the baseline scenario,” the report indicated. However, in a severe stress scenario, the ratio may rise to 3.4 percent. Under severe stress conditions, the GNPA ratios of PSBs may increase from 3.7 percent in March 2024 to 4.1 percent in March 2025, while the ratio for private sector banks (PVBs) may rise from 1.8 percent to 2.8 percent, and for FBs from 1.2 percent to 1.3 percent.

The Financial Stability Report reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on the resilience of the Indian financial system and the risks to financial stability. According to the report, bank credit accelerated during the second half of 2023-24 among PSBs and FBs, while it moderated for PVBs. The share of credit to the services sector and personal loans in the aggregate loan portfolio increased, with personal loans accounting for over half of the credit growth for PVBs.

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