Bad loan: Money is being counted by a person after taking money from the bank
In September 2022, the gross non-performing asset (GNPA) ratio of all scheduled commercial banks (SCBs) was at a seven-year low, latest data reserve Bank of India Has shown. GNPA ratio is the ratio of gross non-performing assets to gross loans and advances. GNPAs are bad debts which the borrower is not in a position to repay at the moment. A loan turns bad or becomes NPA if they are overdue for more than 90 days.
The net non-performing assets (NNPA) ratio was at a ten-year low in September. NNPA ratio is the ratio of net non-performing assets to net loans and advances. 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, NPAs reduce the available capital of the bank for giving new loans. NNPA deducts these provisions from GNPA and hence is a better indicator of bad loans in the bank’s books. chart 1 Shows the NNPA ratio of all SCBs.
Charts appear incomplete? Click To remove AMP mode
These two data points suggest that the issue of non-performing assets, which was a major headache for banks following a detailed asset quality review by the RBI in 2015, is not troubling as much now.
One of the important factors which has led to the decline in NPAs is the decline in the slippage ratio of SCBs. Slippage ratio shows the new accretion of NPAs in a year and is plotted in chart 2, Slippage ratio is calculated by dividing new NPAs by standard advances at the beginning of the period. The slippage ratio for SCBs in September 2022 is around 2%, the lowest since at least 2015.
While the fresh increase in NPAs has come down, another way to reduce bad loans is to write them off the bank’s books. Banks voluntarily opt to write off NPAs in order to maintain a healthy balance sheet. In the first half of FY23, debt write-offs as a ratio of GNPAs increased marginally to 22.6% after declining for two consecutive years. Therefore, a combination of both declining slippages and rising write-offs brought down bad loans to their lowest point in several years.
Click To subscribe to our Data newsletter
As mentioned earlier, banks have to “provision” a part of their profit based on the value and years of existence of NPAs. Additionally, due to the moratorium during the pandemic, banks also had to set aside some profits as a contingency measure. Both factors affected his net profit. However, with NPAs coming down, provisions coming down, moratorium lifted, contingencies eased. Both of these meant that the net profit of both public and private banks is shown above chart 3,
The above factors led to improvement in the profitability of the banks. A bank’s profitability is measured by measuring the bank’s return on assets (ROA = net profit divided by average total assets). An ROA of >=1% is generally considered good. as shown in chart 4In September 2019, the ROA of all scheduled commercial banks had fallen into negative territory. By September 2022, it was back to 0.8%, which was last seen in 2014-15.
Another factor that led to all the changes described above was a drastic change in the areas that banks financed. In 2016, 40% of all outstanding loans were given to industries, while only 20% was given as retail loans. However, by 2022, the share of retail loans exceeded that of industry loans, as shown in chart 5,
This was due to a much higher share of bad loans in the industry sector by 2018, as shown in chart 6, NPAs in the industry sector have also been brought down by a combination of recovery mechanisms such as the Insolvency and Bankruptcy Code and by issuing less fresh loans to industries. On the other hand, bad debts rarely occur in the retail sector.
vignesh.r@thehindu.co.in
Source: Financial Stability Report of the Reserve Bank of India