Banks' bad loans dip further, gross NPAs at 3.6% by March 2024: RBI in its Financial Stability Report

Bad loans in the Indian banking sector have touched a decadal low, the Reserve Bank of India (RBI) has said in its recent report. The report, called the Financial Stability Report (FSR) for June 2023, which was released on Wednesday, further said that a dip in toxic assets is expected by March 2024 under its baseline stress test scenario.  

The Gross Non-Performing Assets (GNPA) of the scheduled commercial banks, which declined to a 10-year low of 3.9 per cent in March 2023, is expected to fall further to 3.6 per cent by March 2024, the central bank said. 

However, the report stated that nearly 10 per cent of retail borrowers are missing monthly payments. These borrowers manage to keep their accounts from slipping into NPAs with some or minimal payments before the 90-day deadline. 

"Although the gross non-performing ratio of retail loans at the system level was low at 1.4 per cent as of March 2023, the share of 'special mention accounts' was relatively high at 7.4 per cent for scheduled commercial banks (SCBs) and it accounted for a tenth of their retail assets portfolio," RBI's latest financial stability report said. 

The RBI conducted stress tests to assess the resilience of SCBs, which revealed that they are well capitalised and are capable of absorbing macroeconomic shocks over a one-year horizon even in the absence of any further capital infusion. 

Stress tests are conducted covering credit risk, interest rate risk and liquidity risk, and the resilience of commercial banks in response to these shocks is studied. 

Using the stress tests, the central bank projects impairment or bad loans and capital ratios over a one-year horizon under a baseline and two adverse scenarios – medium and severe. 

Under the baseline scenario, the aggregate Capital to Risk-Weighted Assets Ratio (CRAR) of 46 major banks is projected to slip from 17 per cent in March to 16.1 per cent by March 2024, the stress test results published in FSR revealed. 

“As per the stress test results, the GNPA ratio of all SCBs may improve to 3.6 per cent by March 2024 under the baseline scenario,” the RBI said. However, if the macroeconomic environment worsens to a medium or severe stress scenario, the GNPA ratio may rise to 4.1 per cent and 5.1 per cent, respectively, the central bank’s half-yearly report said. 

Higher loan growth, decline in slippages, better recoveries and write-offs of bad loans contributed to the improvement in the asset quality of banks in fiscal ended March 2023, the report noted. 

“The write-off to GNPA ratio, which had been declining consecutively through 2020-21 and 2021-22, increased in 2022-23 due to large write-offs by private sector banks,” the RBI said in the report. 

Inflation and loans 

The central bank also presented a detailed analysis of the impact of increasing loan rates amid rising inflation on different categories of home loan borrowers. Highlighting the fact that high inflation in a rising borrowing cost scenario adversely impacts household finances and its loan repayment capacity, RBI said the twin shocks can put even households with sustainable repayment capacities at risk. 

 The RBI report, which had data from 20 banks, found that out of about 2 million home loan accounts, households with monthly income of over Rs 1.4 lakh, accounted for more than 40 per cent of the loans.  

“Due to the coupling effect of inflation and rate increases, even households with sustainable levels of EMI to income ratio (EIR) are at a risk of having negative margins," the report noted. 

A household’s financial margin refers to its income after deducting estimated taxes, housing loan EMIs, and expenditures on necessities. “Another cause for concern is the significant impact it can have on banks’ capital," it added. 

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