Asset quality of Indian banks improves to decadal high: RBI

December 28, 2023

GS Paper III Indian Economy

Context: According to the Reserve Bank of India’s (RBI’s) report titled ‘Trend and Progress of Banking in India’, The Asset Quality of banks have improved to the highest in a decade.

RBI Report on Asset quality of Indian banks

Gross Non-Performing Assets (GNPA): The GNPA ratio of Indian scheduled commercial banks (SCBs) went on improving, dropping to a fresh decadal low.
- The GNPA ratio of SCBs fell to a decadal low of 3.9% at end-March 2023 and further to 3.2% at end-September 2023.
- About 45% of reduction in GNPAs of SCBs was contributed by recoveries and upgradations.
The consolidated balance sheet of scheduled commercial banks (SCBs) in 2022-23 expanded by 12.2 per cent
- It was driven by credit to the retail and services sectors.
- The deposit growth also picked up, although it trailed credit growth.
The capital to risk weighted assets ratio (CRAR) of SCBs was 16.8 per cent at end-September 2023, with all bank groups meeting the regulatory minimum requirement and the common equity tier 1 (CET1) ratio requirement.
Higher net interest income and lower provisioning boosted net interest margin (NIM) and profitability in 2022-23.
Urban Co-operative Banks(UCBs): The combined balance sheet of UCBs expanded by 2.3 per cent in 2022-23, driven by loans and advances.
- Their capital buffers and profitability improved through 2022-23 and Q1:2023-24.
Non-Banking Financial Companies (NBFCs): The consolidated balance sheet of NBFCs expanded by 14.8 per cent in 2022-23,
- It was led by double digit credit growth.
- Profitability and asset quality of the sector also improved in 2022-23.
- The sector remained well-capitalised with CRAR higher than the regulatory requirement.

About NPAs:

NPA or Non Performing Assets are those kinds of loans or advances that are in default or in arrears.
In India, the timeline given for classifying the asset as NPA is 180 days.
- This is against 45 to 90 days of international norms.

GNPA:

It is an absolute amount.
It tells us the total value of gross non-performing assets for the bank in a particular quarter or financial year as the case may be.

Capital to Risk Weighted Assets Ratio (CRAR):

CRAR is also known as Capital Adequacy Ratio (CAR)
- It is the ratio of a bank’s capital to its risk.
- It is arrived at by dividing the capital of the bank with aggregated risk-weighted assets for credit risk, market risk, and operational risk.
CRAR is decided by central banks and bank regulators
- In order to prevent commercial banks from taking excess leverage and becoming insolvent in the process.
The Basel III norms stipulated a capital to risk-weighted assets of 8%.
In India, scheduled commercial banks are required to maintain a CAR of 9%.
- Indian public sector banks are required to maintain a CAR of 12%.
The higher the CRAR of a bank the better capitalized it is.

Way Forward

Banks must guard against credit losses
- Higher capital buffers and provision coverage ratio (PCR) can provide cushions.
In addition to regulatory capital and liquidity requirements, qualitative metrics such as enhanced disclosures, strong code of conduct and clear governance structures would contribute towards financial stability.
Given the increasing interconnectedness between banks and NBFCs, NBFCs should focus on broadbasing their funding sources and reduce overdependence on bank funding.
Banks and nonbanks both need to bring in greater empathy in their customer services.
The banks and NBFCs must further strengthen their balance sheets through robust governance and risk management practices to meet the growing aspirations of the Indian economy.
Special attention of all stakeholders to protect the banking system and the payments system from the risks of fraud and data breaches emanating from cyber threats is needed.