How the pandemic affected the asset quality of banks

The FSR released last week showed that the GNPA of Scheduled Commercial Banks (SCBs) stood at 6.9% at the end of September 2021, from 7.5% in March 2021. A loan or an advance which ceases to generate income for the bank, i.e. for which interest or installment of principal is overdue for more than 90 days, is classified as a non-performing asset or NPA. However, in the wake of the Covid-19 pandemic, as a relief measure, the central bank offered a loan moratorium scheme, which allowed late payment of interest. Debt write-off has also helped in reducing GNPA in 2020-21.

What is the sector wise loan servicing trend?

The GNPA ratio for personal loans was higher at 2.5% in September as against 2.1% in March. The decline was a result of the decline seen in the housing and auto sectors. On the other hand, the GNPA of the industrial sector saw a decline of 9.9% in September 2021 as compared to 11.3% in March 2021. However, sectors such as food processing, chemicals and infrastructure (including electricity) were exceptions, which saw growth. March level. GNPA for the agriculture sector also grew marginally, and stood at 10.2% against 9.8% in March 2021, with services at 6.7% in September, as against 7.5% in March.

What is bad loan trend?

In emerging markets, NPAs tend to peak 6-8 quarters after the onset of a severe recession. While GNPA for public sector banks stood at 8.8% in September, private sector banks fared better with GNPA at 4.6% in September. However, the annual slippage ratio shows that in the first half of FY22, the decline rate for private banks was 4.4%, while it was 3.3% for PSBs.

How were adverse effects avoided?

July 2020 FSR, following the outbreak of coronavirus, stated that the GNPA ratio may increase to 12.5% ​​in the baseline scenario in March 2021 and to 14.7% under severe stress. However, regulatory and other policy support measures helped mitigate the adverse impact, strengthen the bank’s resilience and strengthen credit availability for investment purposes. On the other hand, restructuring of entities under resolution framework and moratorium may result in further trouble later.

How is this relevant to the economy?

Adherence to NPA norms is not only important from the point of view of financial stability of banking institutions, but it also affects their credibility among depositors. NPAs are coming down due to better credit service resulting in improved liquidity of banks. Better liquidity, in turn, helps facilitate more productive economic activity. In addition, financial stability would also mean better use of taxpayers’ money.

Jagdish Shettigar and Pooja Mishra are faculty members at BIMTECH.