The NPA ratio remained high between 2016 and 2019. Later it started declining and continued to do so during the pandemic.
Just four years ago, the non-performing asset (NPA) ratio of Indian banks was the worst among most emerging economies. NPAs are bad loans which the borrower is not in a position to repay at the moment. If a loan remains outstanding for more than 90 days, it becomes bad or NPA. NPA ratio is the ratio of such NPAs to total loans.
Indian banks had an NPA ratio of 9.2% in the second quarter of 2019, which means nearly one in 10 loans were bad. Notably, bad loans remained hidden until the Reserve Bank of India (RBI) conducted a comprehensive asset quality review in 2016.
The NPA ratio remained high between 2016 and 2019. Later it started declining and continued to do so during the pandemic. There could be many reasons for this decline. Firstly, the Insolvency and Bankruptcy Code helped in the recovery of sick debts. Secondly, banks stopped lending large sums of money to industries and increased their share in personal loans.
However, questions remained. First, during and immediately after the pandemic it was not known what proportion of loan accounts under the COVID-19-related moratorium would turn into NPAs. The second issue was the sudden shift of the portfolio from industrials to personal loans. What if customers availing personal loans are also not able to repay their loans, given that the industries, which pay salaries to these customers, are not doing well? Third, the decline in NPAs, especially in FY2020, can be largely attributed to loan waivers. Banks have to set aside (or make provision for) a part of their profits as a buffer for possible losses arising out of NPAs. Thus, NPA reduces the available capital of the bank for giving new loans. Hence, banks voluntarily choose to write off NPAs to maintain a healthy balance sheet. In FY2020, the gross NPAs (GNPAs) written off by public sector banks reached a six-year high.
However, the latest Financial Stability Report released by RBI last month answers some of these questions.
chart 1 Shows that GNPAs and NNPAs continued to decline and reached 3.9% and 1%, respectively, in March 2023, the lowest levels since 2015.
Chart 1 | The chart shows the gross non-performing assets (GNPA) and net non-performing assets (NNPA) in Indian banks.
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chart 2 indicating that the profitability of the banking sector has seen a significant improvement, with the return on assets (RoA) climbing to 1.1% in 2023, up from a negative 0.2% in 2018. ROA is calculated by dividing a bank’s net income by its total assets. A RoA of >=1% is generally considered good. This positive change has contributed to the capital to risk-weighted assets ratio (CRAR) reaching a record peak of 17.1% in 2023. A key indicator of a bank’s health is its capital position, specifically its CRAR which measures a bank’s exposure to risky loans. ,
Chart 2 | The chart shows the return on assets (ROA) and the capital to risk-weighted assets ratio (CRAR). RoA is calculated by dividing the total income of the bank by its total assets.
Chart 3 | The chart shows the ratio of write-off to GNPA, which was on a steady decline during 2020-21 and 2021-22. However, this ratio is set to increase in 2022-23, mainly due to large scale write-offs by private sector banks.
Chart 4 | The chart shows the category wise GNPA ratio of personal loans.
The ratio has declined against all types of personal loans such as housing, credit cards, vehicle loans and education loans.
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These charts show that at present the recovery of the banks is continuing and their health is improving. This is indicative of the fact that there was no significant spurt in NPAs due to moratorium during post-Covid-19, as expected. Portfolio transformation in personal loans is also working with low NPAs in that sector. But the fact that write-offs are playing a significant role in bringing down NPAs is a cause for concern.
Source: Financial Stability Report published by the Reserve Bank of India in June 2023 (Issue No. 27)
vignesh.r@thehindu.co.in
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