Indian Banks See Big Drop in Bad Loans by June 2024
Net Non-Performing Assets (NNPAs) of scheduled commercial banks (SCBs) in India saw a significant decline, reducing by 24.9% year-on-year to Rs 1 lakh crore as of June 30, 2024, according to CareEdge Ratings.
The gross non-performing assets (GNPAs) of SCBs fell by 15.2% year-on-year to Rs 4.57 lakh crore as of Q1FY25, compared to Rs 5.66 lakh crore in the same period last year. The GNPA ratio now stands at 2.8%, a reduction from 3.8% a year ago. This drop is primarily due to lower slippages, higher recoveries, and steady write-offs over the last year.
The Indian banking sector has continued its positive trajectory with reductions in both gross and net non-performing assets (NPAs) for SCBs as of June 30, 2024. The NNPA ratio has reached an all-time low of 0.6%, down from 1.0% in Q1FY24.
Despite this, the decline in NNPAs within SCBs varied, as private banks (PVBs) witnessed a marginal increase of 3 basis points (bps) in their NNPA ratio, driven by seasonal collection weaknesses and higher retail delinquencies, leading to a current NNPA ratio of 0.46%. Private sector banks (PSBs), in particular, have managed to bring down their incremental provisioning levels due to consistent asset quality improvements. They have contributed to the overall improvement in the banking sector’s asset quality.
The proposed provisioning norms for projects under construction by the Reserve Bank of India (RBI) could impact SCBs’ credit costs in the coming years, with public banks expected to see a 0.2% increase in credit costs between FY25 and FY27. Additionally, private banks could face a 0.1% increase during the same period.
Moreover, downside risks to this positive trend include elevated crude oil prices, a potential global economic slowdown, and tightening global monetary policies. These factors could influence asset quality and profitability in the coming quarters.
The Indian banking sector’s asset quality has reached pre-asset quality review (AQR) levels. The GNPA ratio of SCBs at 2.8% and the NNPA ratio at 0.6% reflect a sustained improvement. Credit offtake, which grew by 18.1% year-on-year in Q1FY25, is expected to remain strong, supported by economic expansion, capital expenditure increases, and government schemes like the Production Linked Incentive (PLI) initiative.
While the outlook for SCBs remains positive, external economic factors and RBI’s proposed provisioning changes may influence the trajectory of asset quality in the coming quarters.
Doubts Revealed
Net Non-Performing Assets (NNPAs) -: NNPAs are loans given by banks that are not being repaid properly. ‘Net’ means the total amount after subtracting some money that banks expect to recover.
Scheduled commercial banks -: These are banks that are listed under the Reserve Bank of India Act. They follow certain rules and regulations set by the RBI.
Rs 1 lakh crore -: This is a large amount of money. ‘Rs’ stands for Indian Rupees, and ‘1 lakh crore’ means 1 trillion rupees.
Gross Non-Performing Assets (GNPAs) -: GNPAs are the total amount of loans that are not being repaid properly, without subtracting any expected recoveries.
GNPA ratio -: This is a percentage that shows how much of the total loans given by banks are not being repaid properly.
Private banks -: These are banks that are owned by private individuals or companies, not by the government.
Seasonal collection issues -: This means that at certain times of the year, it is harder for banks to collect loan repayments, maybe due to holidays or farming seasons.
Reserve Bank of India (RBI) -: The RBI is India’s central bank. It controls the money supply and interest rates in the country.
Provisioning norms -: These are rules that tell banks how much money they need to set aside to cover bad loans.
Credit costs -: This is the cost that banks incur when they lend money, including the risk of not getting it back.
Crude oil prices -: This is the cost of raw oil, which can affect the economy because oil is used in many products and transportation.
Asset quality -: This refers to how good or bad the loans and investments of a bank are. Better asset quality means fewer bad loans.