RBI Financial Stability Report: Gross NPAs of Indian banks fall to seven-year low in September

The gross non-performing asset (GNPA) ratio of scheduled commercial banks (SCBs) fell to a seven-year low of five percent in September 2022, the Reserve Bank of India (RBI) said in its financial stability report (FSR) on December 29.

The net non-performing assets (NNPA) dropped to a 10-year low of 1.3 percent in September 2022, the FSR report said.

"Stress test results presented in this issue of the FSR indicate that banks would be able to withstand even severe stress conditions, should they materialise," RBI Governor Shaktikanta Das said in the foreword of the FSR report.

"Furthermore, in spite of formidable global headwinds, India’s external accounts remain well-cushioned and viable," Das said.

Macro stress tests for credit risk reveal that banks would be able to comply with the minimum capital requirements even under severe stress scenarios, the RBI report said.

"None of the 46 SCBs would breach the regulatory minimum capital requirement of nine percent in the next one year, even in a severely stressed situation, although nine SCBs may fall short of the minimum capital inclusive of capital conservation buffer," the RBI report showed.

The FSR report is an RBI publication that offers insights into the health of the Indian banking system.

Das said the RBI and the other financial regulators remain vigilant to ensure the stability and soundness of the financial system through appropriate interventions, Das added.

According to the FSR report, buoyant demand for bank credit and early signs of a revival in the investment cycle are benefiting from improved asset quality, return to profitability and strong capital and liquidity buffers of banks.

Banks have seen improvement in the GNPA ratio in respect of the industrial sector although it remained elevated for gems and jewellery and construction sub-sectors, the FSR report showed.

The asset quality of the personal loans segment improved during the first half of fiscal year 2022-23, especially for housing and vehicle loans, the report noted.

Bad loans of large borrowers decline

According to the FSR report, the share of large borrowers in gross advances of banks has been on a declining path and the share in total GNPA fell to 62.2 percent in September 2022 from 75.6 percent two years earlier, the RBI report said.

The GNPA ratio of large borrowers continued to improve and stood at 6.4 percent in September 2022 from over 10 percent in March 2021, the report showed.

Also, the share of the top 100 large borrowers in the total loan book of banks continued to rise and stood at 17.4 percent in September 2022, signalling fresh borrowing by large corporates, the FSR report showed.

The asset quality of top 100 borrowers too improved considerably as their share in SCBs GNPA declined from 6.8 percent in March 2022 to 5.4 percent in September 2022, the FSR report showed.

Bad loans to improve further

According to the FSR report, stress tests indicate that the GNPA ratio of all SCBs may improve from five percent in September 2022 to 4.9 percent by September 2023, under the baseline scenario.

"The decrease in slippage, increase in write-offs and the continuous improvement in loan growth brought the GNPA ratio further down to 5.0 percent in September 2022," said the FSR report.

However, if the macroeconomic environment worsens to a medium or severe stress scenario, the ratio may rise to 5.8 percent and 7.8 percent, respectively, the RBI report said.

At the bank group level, the GNPA ratios of PSBs may swell from 6.5 percent in September 2022 to 9.4 percent in September 2023, whereas it would go up from 3.3 percent to 5.8 percent for private banks, the FSR report showed.

For foreign banks, this ratio may change from 2.5 percent to 4.1 percent under the severe stress scenario, the report stated.