Indian banks continue to show positive trends in their asset quality, reaching a new ten-year low in the gross non-performing asset (GNPA) ratio by the end of September, according to the Reserve Bank of India (RBI).
The GNPA ratio for Scheduled Commercial Banks (SCBs) fell to 3.2 percent as of September 2023, after a decline of 3.9 percent at the end of March 2023. This continued improvement in asset quality has been consistent since the financial year 2018-19. , RBI said in its Banking Trends and Progress report.
During 2022-23, about 45 percent of the reduction in GNPAs of SCBs was contributed through recoveries and upgradations.
The agriculture sector recorded the highest GNPA ratio, while retail loans showed the lowest.
Both banking and non-banking financial companies (NBFCs) have shown resilience, supported by high capital ratios, improved asset quality and robust earnings growth, contributing to double-digit credit growth and domestic economic activity. However, the RBI underlined the importance of strengthening governance and risk management practices to support this positive trajectory and build additional buffers.
Slip ratio
The slip ratio, measuring new increases to NPAs as a percentage of standard advances, witnessed moderation during 2022-23 and continued to do so in the first half of 2023-24.
“The slip ratio – which measures new increases to NPAs as part of standard advances at the start of the year – moderated during 2022-23 and further into H1: 2023-24. A mix of write-offs, upgrades and recoveries contributed to a reduction in NPAs,” said the central bank’s report.
The share of large loan accounts (accounts with a total exposure of Rs 5 crore and above) in total advances declined to 46.4 percent at the end of March 2023 from 47.8 percent a year ago. Their contribution to total NPAs also fell during the year to 53.9 percent from 64.0 percent. The SMA-1 and SMA-2 ratios, which indicate potential stress, decreased across bank groups for overall as well as large loan accounts.
Bank growth
The report highlighted that consolidated balance sheets of commercial banks experienced a remarkable growth of 12.2% in 2022-23, the highest in nine years, mainly driven by robust credit growth. Despite this, the total reported bank frauds reached a six-year low during this period.
The increase in the ratio of standard assets to total advances has been continued for all banking groups during 2022-23. The amount of NPAs decreased for all banking groups, except SFBs.
Following the Reserve Bank’s resolution frameworks 1.0 and 2.0 announced in response to COVID-19-related disruptions, the number of restructured accounts peaked in 2021-22. With this particular ban coming to an end, they moderated in 2022-2. The share of restructured standard advances (RSA) in gross loans and advances decreased from 1.8 percent at the end of March 2022 to 1.2 percent at the end of March 2023, led by PVBs.
While NBFCs also saw significant balance sheet growth supported by double-digit credit expansion, the RBI cautioned on closely monitoring the high interconnection between banks and NBFCs, emphasizing diversification of funding sources for NBFCs and assessing exposure for banks.