THE GROSS non-performing assets (GNPA) of the country’s scheduled commercial banks, which declined to a 10-year low of 3.9 per cent in March 2023, is expected to fall further to 3.6 per cent by March 2024, the Reserve Bank of India (RBI) said Wednesday. If the macroeconomic environment worsens, though, the GNPA ratio may rise sharply, the central bank said in its Financial Stability Report (FSR) for June 2023 released on Wednesday.
The estimate for GNPA for March 2024 is based on the macro stress tests performed to assess the resilience of banks’ balance sheets to unforeseen shocks emanating from the macroeconomic environment. One of the reasons for the fall in gross NPA in 2022-23 was large write-offs by banks.
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“As per the stress test results, the GNPA ratio of all SCBs may improve to 3.6 per cent by March 2024 under the baseline scenario,” the RBI said. However, if the macroeconomic environment worsens to a medium or severe stress scenario, the GNPA ratio may rise to 4.1 per cent and 5.1 per cent, respectively, the central bank’s half-yearly report said.
At the bank group level, the GNPA ratios of public sector banks (PSBs) may swell from 5.2 per cent in March 2023 to 6.1 per cent in March 2024 under the severe stress scenario, whereas it may go up from 2.2 per cent to 3.8 per cent for public sector banks and from 1.9 per cent to 2.6 per cent for foreign banks.
Stress tests are conducted covering credit risk, interest rate risk and liquidity risk, and the resilience of commercial banks in response to these shocks is studied. Using the stress tests, the RBI projects impairment or bad loans and capital ratios over a one-year horizon under a baseline and two adverse scenarios – medium and severe.
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Higher loan growth, decline in slippages, better recoveries and write-offs of bad loans contributed to the improvement in the asset quality of banks in fiscal ended March 2023.
“The write-off to GNPA ratio, which had been declining consecutively through 2020-21 and 2021-22, increased in 2022-23 due to large write-offs by private sector banks,” the RBI said in the report.
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In the fiscal ended March 2023, the net non-performing assets (NNPA) ratio of scheduled commercial banks (SCBs) declined to 1 per cent – a level last observed in June 2011. A low NNPA ratio indicates the active and deep provisioning made by banks.
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The report said while there has been an overall improvement in asset quality in respect of personal loans in FY23, impairments in the credit card receivables segment have risen marginally. Within the industrial sector, asset quality continued to improve across sub-sectors.
The asset quality of the top 100 borrowers improved, with their share in banks’ GNPA declining from 6.8 per cent as of March 2022 to 1.6 per cent as of March 2023.
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In the foreword of the FSR report, RBI Governor Shaktikanata Das said the financial sector in the country has been stable and resilient, as reflected in sustained growth in bank credit, low levels of non-performing assets and adequate capital and liquidity buffers. “Both banking and corporate sector balance sheets have been strengthened, engendering a ‘twin balance sheet advantage’ for growth,” Das wrote.
He said the recent banking turmoil in certain advanced economies suggests that new risks have necessitated reassessment of global standards on financial sector regulations.
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While international cooperation among regulators on these issues is of paramount importance, so far as India is concerned, both regulators and regulated entities need to stay the course with an unwavering commitment to ensuring a stable financial system, the Governor said.
“It has to be remembered that seeds of vulnerability often get sown during good times when risks tend to get overlooked,” Das said. He said that financial stability is non-negotiable and all stakeholders in the financial system must work to preserve this at all times.
The FSR report said that the macro stress tests for credit risk reveal that banks would be able to comply with the minimum capital requirements even under severe stress scenarios.
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The system-level capital to risk-weighted assets ratio (CRAR) in March 2024, under baseline, medium and severe stress scenarios, is projected at 16.1 per cent, 14.7 per cent and 13.3 per cent, respectively, it said.