Private banks masking worsening retail asset quality with write-offs: RBI

The GNPA ratio for unsecured lending was marginally higher, at 1.7 per cent

While the banking system’s overall asset quality continues to improve, the Reserve Bank of India (RBI)'s Financial Stability Report (FSR) flagged the issue of write-offs by private banks, saying these could partly mask worsening asset quality in the retail loan segment and a dilution in underwriting standards.

 

According to the report, banks’ retail loan quality has remained stable so far, with the gross non-performing asset (GNP) ratio standing at 1.2 per cent in September 2024. The special mention accounts in categories 1 and 2, a lead indicator of incipient stress, also declined to 2.5 per cent in September from 3.0 per cent a year ago.

 

The GNPA ratio for unsecured lending was slightly higher at 1.7 per cent.

 

“An area of concern, however, is the sharp rise in write-offs, especially among private banks, which could be partly masking worsening asset quality in this segment and a dilution in underwriting standards,” the report said.

 

The fresh accretion of NPAs in retail loan portfolios was dominated by slippages in the unsecured loan book, with 51.9 per cent of NPAs as of end-September 2024.

 

Among bank groups, small finance banks (SFBs) are seeing larger impairments in their retail lending portfolios, with the GNPA ratio at 2.7 per cent, the SMA (1+2) ratio at 3.6 per cent, and the unsecured GNPA ratio at 4.7 per cent, it said.

 

The report highlighted a decline in the banking system’s liquidity coverage ratio (LCR), which fell to 128.5 per cent in September from 135.7 per cent a year ago, with public sector banks (PSBs) experiencing a sharper drop.

 

“LCR of PSBs declined sharply to 127.4 per cent in September from 142.1 per cent a year ago, whereas LCR of private banks stood marginally lower at 126.1 per cent,” the report said.

 

It also observed changes in banks’ deposit profiles due to a decline in the share of low-cost current account savings account (CASA) deposits in favour of term deposits, particularly in higher interest rate buckets. This indicated growing competition for savings and an investor preference for financial products offering higher returns.

 

Term deposits formed 82 per cent of incremental deposits mobilised in the first half of 2024-25. 

 

On bank credit growth, the report noted that industrial credit has been accelerating from low levels but remains below the growth in loans to other major sectors.

 

Services and personal loans led the overall credit growth. Within personal loans, credit card receivables continued to post robust growth.

 

“Growth in personal loans has halved from high levels on the back of both high base and lower originations, but its expansion continued to be broad-based, with housing loans as the standout contributor,” it said.

 

The asset quality of scheduled commercial banks (SCBs) improved further, with their GNPA ratio declining to a 12-year low of 2.6 per cent in September. The Net NPA ratio remained at around 0.6 per cent.

 

However, the half-yearly slippage ratio, which measures new accretions to NPAs as a share of standard advances at the beginning of the half-year, increased marginally to 0.7 per cent.

 

“Disaggregation of NPA movements reveals that write-offs remain a significant component of NPA reduction,” it said.

 

In the retail loans segment, while asset quality remained largely stable, the report observed a marginal uptick in credit card NPAs across bank groups. Credit cards recorded the highest growth in retail loans, which may require ‘careful monitoring.’

 

Stress test: Gross NPA to rise under baseline scenario

 

Stress test results on asset quality indicated that the aggregate GNPA ratio of 46 banks may rise from 2.6 per cent in September 2024 to 3.0 per cent in March 2026 under the baseline scenario and further to 5 per cent and 5.3 percent, respectively, under adverse scenario 1 and adverse scenario 2.

 

In the previous FSR, stress tests indicated that the GNPA ratio across all SCBs might improve to 2.5 per cent by March 2025 under the baseline scenario.

 

On capital adequacy, results reveal that the aggregate capital adequacy ratio (CAR) of 46 major SCBs may decline from 16.6 per cent in September 2024 to 16.5 per cent by March 2026 under the baseline scenario and to 15.7 per cent under adverse scenario 2.

 

“No bank would fall short of the minimum capital requirement of 9 per cent under both the scenarios. However, under adverse scenario 1, SCBs’ aggregate CRAR may deplete to 14.3 per cent and four banks may breach the minimum capital requirement of 9 per cent,” it said.