Over the last few years, the world has been hit hard by the Covid-19 pandemic, geopolitical tensions, rising inflation and interest rates, all of which had a bearing on India's economic growth. However, scheduled commercial banks in India seem to have weathered the challenges well, with their gross bad loans touching a decadal low.
According to the Financial Stability Report released by the Reserve Bank of India, the gross non-performing assets (GNPA) of scheduled commercial banks (SCB) declined to 3.9 per cent in March 2023, a ten-year low. Net non-performing assets (NNPA) also improved to 1 per cent, a level last seen back in June 2011, the report pointed.
The GNPAs of SCBs had hit a record 11.5 per cent in March 2018, with GNPAs of state-owned banks touching 14.6 per cent at the time. But subsequent measures taken by the government and banks, including recognition, reclassification of standard restructured advances as NPAs and making adequate provisions for the expected losses from such loans, have helped bring down NPAs.
The decline in NPAs is indicative of "active and deep provisioning" for bad loans, said the central bank.
"In fact, SCBs' provisioning coverage ratio (PCR) improved to 74 per cent in March 2023," RBI said.
The quarterly slippage ratio, which measures new accretions to NPAs as a share of standard advances at the beginning of the quarter has also moderated further, it added.
"The improvement in SCBs' asset quality has been broad-based with a steady decline in the stressed advances ratio across all major sectors," the Reserve Bank noted.
However, it also pointed that while there has been an overall improvement in asset quality in respect of personal loans, impairments in the credit card receivables segment have risen marginally. Within the industrial sector, asset quality continued to improve across sub-sectors, it said.
"Stress test results reveal that SCBs are well capitalised and capable of absorbing macroeconomic shocks over a one-year horizon even in the absence of any further capital infusion," said the RBI.
RBI Governor Shaktikanta Das noted that since the last issue of the FSR in December 2022, the global and Indian financial systems have charted different trajectories.
"The global financial system has been impacted by significant strains since early March 2023 from the banking turmoil in the US and Europe. In contrast, the financial sector in India has been stable and resilient as reflected in sustained growth in bank credit, low levels of NPAs and adequate capital and liquidity buffers," said Das.
Under the baseline scenario, the aggregate CRAR (capital to risks weighted assets ratio) of 46 major banks is projected to slip to 16.1 per cent by March 2024, from 17 per cent in March 2023. In the medium stress scenario it may go down to 14.7 per cent and even to 13.3 per cent under severe stress scenario, the RBI projected. But, even then it will be above the minimum capital requirement, including capital conservation buffer, of 11.5 per cent.
Both banking and corporate sector balance sheets have been strengthened, engendering a twin balance sheet advantage for growth, said Das.