Banks bad loans ratio at 13-year low, highest for farm sector

Context: The Gross non-performing assets (GNPAs) ratio of scheduled commercial
banks (SCBs) declined toa more than 13-year low of 2.5% at the end of September
2024. GNPAs of banks reduced by 15.9% year-on-year to Rs. 4.8 lakh crore as on
March 31, 2024. The improvement in the asset quality of lenders was on account
of better recoveries and upgradations. According to a report, the latest data
indicates that that the gross NPA ratio improved further to 2.5% at the end-September
2024. The proportion of standard assets in total advances rose for all bank
groups at end-March 2024 from a year ago. At the end of March 2024, the share
of large borrowable accounts in total advances of SCBs declined to 43.9% from 46.5%
at the end of previous year.

Key points

·       Overview: The latest
financial stability report released by the Reserve Bank of India (RBI) shows a
continuous decline in both Gross Non-performing assets (GNPAs) and Net NPAs,
reaching their lowest levels since 2015.

·       Bad
loans/ Non-Performing Assets (NPA’s): NPA is a term used to
classify loans or advances that are in default. It indicates the inability of
borrowers to fulfil their repayment obligations to the lender. In general, a
loan is classified as an NPA when the borrower fails to make payments for a
specified period, typically 90 days or more.

Ø  Gross
Non-Performing Assets (GNPA) - This refers to the total amount of loans or
advances that have been defaulted by borrowers.

Ø  Net
Non-Performing Assets (NNPA) - NNPA is derived by deducting the provision
amount from the GNPA. Provision refers to the amount set aside by banks or
financial institutions as a precautionary measure to cover potential losses
arising from NPAs.

·       Factors
contributing to the decline in NPAs: Insolvency and
Bankruptcy Code (IBC) - The implementation of the Insolvency and Bankruptcy
Code in 2016 played a crucial role in the recovery of sick loans. It provided a
structured and time-bound framework for resolving distressed assets, leading to
improved NPA management and recovery.

Write-offs - The reduction
in NPAs, particularly in FY20, can be attributed to the practice of writing off
bad loans. Banks voluntarily wrote off NPAs to maintain healthy balance sheets,
which had a positive impact on the overall NPA ratio. However, the continued reliance
on write-offs raises concerns about the sustainability of this approach in the
long run.

·       Implications
for the banks: Improved Asset Quality - A decrease in NPAs
indicates an improvement in the asset quality of banks. It suggests that a
lower proportion of loans are in default or arrears, reflecting healthier
lending practices and reduced credit risk. Banks with lower NPAs are better
positioned to maintain stability and profitability in their loan portfolios.

Increased
Profitability - Lower NPAs positively impact banks’ profitability. When the proportion
of bad loans decreases, banks experience fewer loan write-offs and provisioning
requirements. This results in lower expenses associated with NPA resolution and
provisioning, thereby enhancing profitability and improving the bottom line.

·       Conclusion: Indian banks
have made remarkable progress in reducing NPAs, as evident from the declining
NPA ratios and improved profitability. However, the reliance on write-offs
raises concerns about the sustainability of this trend. To ensure long-term
stability, banks must prioritize prudent lending practices and effective risk
management.