There has been a continuous decline in the banking system’s non-performing asset (NPA) ratio from 7.5% in the first quarter of FY22 to 5.7% in the first quarter of the current financial year, as shown in data compiled by Bank of Baroda research.
Public sector banks’ NPA ratio has come down from 9.4% in June 2021 to 7.2%, a drop of 220 bps, while at private banks, the decline was 110 bps, from 4.2% to 3.1%, in the same period. One basis point is one-hundredth of a percentage point.
To be sure, the data for state-owned banks includes IDBI Bank, which was reclassified as a private sector lender in 2019 after Life Insurance Corp. of India (LIC) bought a 51% stake in the bank.
The largest domestic lender, State Bank of India (SBI), saw a 141 bps contraction in gross NPA ratio in the June quarter and said it made adequate provisions to deal with uncertainties in the coming quarters.
“In terms of asset quality, we do not see any challenge. Our gross NPAs and net NPAs have come down, and we have adequately provided for the stress which is there in our book," Dinesh Khara, chairman of SBI, said on 6 August.
Khara said there is hardly any challenge in the corporate book, and even in the retail book, NPAs are well under control. Pointing out that small and medium enterprises are one area where the bank has some bad loans, Khara said that part of it originated from the restructured book.
Bankers said that an improvement in corporate credit performance is primarily responsible for strengthening asset quality in the last few quarters.
“Coming to asset quality, I think we have seen this trend in terms of improving asset quality sustained right through the pandemic. As we have discussed before, this has largely been driven by the improvement in the corporate credit cycle that continues," Sanjiv Chadha, chief executive of Bank of Baroda, told analysts on 1 August.
Analysts see a trend of declining bad loans in the coming quarters. In its Global Banking Outlook—Midyear 2022, released on 21 July, S&P Global Ratings projected that bad loans in India’s banking sector will decline to 5%-5.5% of gross loans by 31 March 2024. It forecasts credit costs to stabilize at 1.5% for FY23 and further normalize to 1.3%, making credit costs comparable to those of other emerging markets and to India’s 15-year average.
“The small- and mid-size enterprise sector and low-income households are vulnerable to rising interest rates and high inflation. But, in our base case of moderate interest rate hikes, we view these risks as limited," the report said.
Others see banks reaching close to the 5% mark in gross NPAs by the end of the current fiscal. According to rating agency Icra, with a lower slippage rate and better credit growth, bank bad loan ratios are expected to decline further to 5.2-5.3% by 31 March 2023. Net NPAs may, however, remain range-bound at 1.6-1.8% as the recoveries and upgrades could moderate in the current year in the absence of restructuring, it said on 12 July.
Icra, however, cautioned that notwithstanding the improving headline asset quality numbers, the stressed assets—net NPAs and standard restructured loans—stood at 3.8% of standard advances as on 31 March, higher than the pre-covid level of 3.1%.
“The performance of the restructured loans has not been very encouraging as ₹25,000 crore, or 14% of the covid restructured loans of ₹1.85 trillion, slipped in the second half of FY22 and ₹14,500 crore, or 8%, was repaid by borrowers," said Anil Gupta, vice-president at Icra.
