The Indian banks which have been grappling with the challenge of rising NPAs are going to see positive momentum as the Gross Non-Performing Assets (NPAs) of Indian banks is likely to touch a decadal low of sub-four per cent by March 2024 as per a study by ASSOCHAM-CRISIL RATING.
The Gross NPAs are expected to decline by 90 basis points (bps) year-on-year to less than five per cent, in the current financial year and by another 100 bps to a decadal low of sub-four per cent by March 31, 2024. This fall is being attributed to the post-pandemic economic recovery and higher credit growth.
As per the study, the biggest improvement is expected in the corporate segment, where gross NPAs are seen falling below two per cent in the next fiscal from a peak of about 16 per cent as on March 31, 2018. The study pointed out that significant clean-up of books by banks in recent years, as well as strengthened risk management and underwriting, has led to higher preference for borrowers with better credit profiles. The steady improvement in corporate asset quality is clearly manifested in key indicators such as the credit quality of bank exposures.
“The twin balance sheet problem has largely been addressed, creating a situation where the credit growth has started to move up significantly. Our banking sector is quite robust even in the midst of continuing global challenges,'' remarked Deepak Sood the Secretary General of ASSOCHAM.
The study has further observed that the gross NPAs in the MSME segment, which suffered the most during the pandemic, may rise to 10-11 percent by March 2024 from about 9.3 percent as on March 31, 2022. The ASSOCHAM-CRISIL RATING report said that while relief measures did help contain asset quality deterioration last fiscal, the MSME segment saw the most restructuring, at about six per cent, compared with two per cent for the overall banking sector.
The report also highlighted that the retail segment has maintained steady asset quality with gross NPAs expected to be range bound at 1.8-2 per cent over the medium term. While the impact of higher interest rates and inflation on cash flows of individual borrowers will need to be monitored, almost half of the retail loans are home loans, where borrowers that banks cater to have relatively better credit profiles. Segments such as unsecured loans may see some pressure. Also, while retail NPAs are expected to remain steady on a percentage basis, the absolute quantum of NPAs may rise given the sharp growth in the portfolio, thus providing an opportunity for asset reconstruction companies (ARCs).
The report observes that the gross NPAs of banks had peaked at 11.2 per cent as on March 31, 2018. On the other hand the NBFCs, after a good run, started facing funding access challenges after a large infrastructure financier defaulted in September 2018. Asset quality in the wholesale book of NBFCs also started displaying signs of stress. Interestingly the report says that today however the asset quality of the financial sector is at its healthiest in recent times, specifically because of the sharp reduction in NPAs in corporate loans, indicating that opportunity for ARCs in corporate loans is perhaps at a cyclical low. That said, retail assets, which have garnered more interest from ARCs in the past couple of years, continue to offer a meaningful opportunity. As do loans to micro, small and medium enterprises (MSMEs).
The report also notes that the steady improvement in corporate asset quality is clearly manifested in key indicators such as the credit quality of bank exposures. The proposed sale to the newly formed National Asset Reconstruction Company Ltd (NARCL) is also expected to support the reduction in gross NPAs.
The report further observes that for even the NBFCs, asset quality concerns are receding with metrics across segments showing a clear improvement in the first half of this fiscal and the fundamentals expected to hold with an improving macroeconomic environment. The report further adds that unsecured loans had seen the maximum reduction in the restructured book due to either repayments or write-offs. On the other hand, the restructured portfolio in vehicle finance has reduced but the residual book has the potential for slippages.