Bad loans at banks expected to decline further

1 Jul 2022 , 01:37 PM

On the strength of increased lending and a trend toward reducing NPA stock, the Reserve Bank of India stated on Thursday (01-07-2022) that bad loans at banks are anticipated to continue to decrease, from a six-year low to 5.3% of total advances by March 2023.

It did issue a warning, though, that if the macroeconomic climate deteriorates, the share of subprime loans may rise. In March 2022, banks’ gross non-performing asset (GNPA) ratio dropped to a six-year low of 5.9%. In March 2021, the GNPA ratio of scheduled commercial prohibitions (SCBs) was 7.4%.

Even when regulatory reliefs came to an end, support measures the regulator offered during the COVID-19 pandemic helped to stop the GNPA ratios of SCBs.

“Under the assumption of no further regulatory reliefs as well as without taking into account the potential impact of stressed asset purchases by NARCL, stress tests indicate that GNPA ratio of all SCBs may improve from 5.9% in March 2022 to 5.3 in March 2023 under the baseline scenario,” according to the RBI. This improvement would be fueled by higher expected bank credit growth and a declining trend in the stock of GNPAs, among other factors.

The first batch of non-performing bank accounts is anticipated to be taken over by the bad bank, also known as the Rs 6,000 crore National Asset Reconstruction Company (NARCL), in July.

The RBI also stated in its 25th issue of the Financial Stability Report (FSR), which was published on Thursday, that the GNPA ratio might increase to 6.2% and 8.3%, respectively, if the macroeconomic situation deteriorates to a medium or severe stress scenario.

According to the base case, the GNPA ratios may decrease by March 2023 at the bank group level as well. However, in the severe stress scenario, the public sector banks’ (PSBs’) GNPA ratios might rise from 7.6% in March 2022 to 10.5% a year later. Over the same period, the GNPA ratios for private sector banks would increase from 3.7% to 5.7% and for foreign banks from 2.8% to 4%.