Business Standard

Banks' gross NPA ratio falls below 3%, a first since 2012: RBI report

Lenders set to meet minimum capital need even under severe stress

NPA, banks, RBI, loan, bank loans

Illustration: Binay Sinha

Manojit Saha Mumbai

Listen to This Article

This report haas been updated

Asset quality of commercial banks continued to show an upward trend, with their gross non-performing asset (GNPA) ratio falling to a 12-year low of 2.8 per cent at the end of March 2024 from 3.2 per cent in September last year. Net NPA ratio also fell to 0.6 per cent from 0.9 per cent during the same period, the biannual Financial Stability Report of the Reserve Bank of India (RBI) showed on Thursday.

Under the baseline scenario of stress tests, the GNPA ratio of all scheduled commercial banks might improve to 2.5 per cent by March 2025, the report said. Macro stress tests for credit risk reveal that all banks would be able to meet the regulatory minimum capital even under a severe stress scenario.
 

“The Indian banking sector recorded sustained improvement in capital positions, asset quality and profitability amid a strong business expansion,” the report said. It noted that among bank groups, public sector banks (PSBs) recorded a substantial reduction in their GNPA ratio (76 bps) during the second half of FY24.

“While the GNPA stock decreased across all bank groups, active and deep provisioning by PSBs and FBs [foreign banks] resulted in an improved provision coverage ratio in March 2024 (76.4 per cent),” the report said.

Even as improvement in banks’ asset quality was broad-based, the impairment ratio in agriculture remained the highest, despite persistent improvement during the second half of 2023-24.

Chart

The stress test results showed that if the macroeconomic environment worsened to a severe stress scenario, the GNPA ratio might rise to 3.4 per cent. Under severe stress, GNPA ratios of PSBs could increase from 3.7 per cent in March 2024 to 4.1 per cent in March 2025; for private banks it might go up from 1.8 per cent to 2.8 per cent; and for foreign banks from 1.2 per cent to 1.3 per cent.

The report said the capital to risk-weighted assets ratio (CRAR) and the common equity Tier-I (CET1) ratio of scheduled commercial banks (SCBs) stood at 16.8 per cent and 13.9 per cent, respectively, at the end of March 2024.

Owing to an increase in risk weighting on unsecured loans and loans to non-banking financial companies (NBFCs), capital adequacy ratios of private banks took a knock, even as they increased for state-run banks.

“As growth in risk-weighted assets (RWA) outpaced the growth in total capital for private banks and FBs, the system-level CRAR declined by 37 bps during 2023-24,” the report said.

Stress test results reveal that SCBs are well-capitalised and capable of absorbing macroeconomic shocks even in the absence of any further capital infusion by stakeholders.

Under the baseline scenario, the aggregate CRAR of 46 major banks is projected to slip from 16.7 per cent in March 2024 to 16.1 per cent by March 2025. It may go down to 14.4 per cent in the medium stress scenario and to 13.0 per cent under severe stress scenario by March 2025, which is still above the minimum capital requirement, the report noted.

The report highlighted that interconnectedness among financial sector entities continued to rise in terms of bilateral exposures.

“The total bilateral exposures among the entities in the Indian financial system continued to expand during the second half of 2023-24, primarily driven by increasing exposure of AMC-MFs with SCBs and all-India financial institutions with SCBs,” it added.

Don't miss the most important news and views of the day. Get them on our Telegram channel

First Published: Jun 27 2024 | 6:54 PM IST

Explore News