Indian banks are experiencing a positive outlook as their gross non-performing assets (NPAs) drop down to a decade low below 4% by the end of the financial year 2023-24, according to a recent study. This development is considered to be a significant improvement from the deteriorating condition of the banking sector’s asset quality in the past few years. The decline in gross NPAs is primarily driven by moderation in slippages from good-quality assets and upgradation of stressed debts by the banks.
The study indicates that the accumulation of provisions on NPAs has started to pay off for the banking sector, thereby contributing to an improvement in profitability. The asset quality review conducted by the Reserve Bank of India (RBI) has forced banks to adhere to conservative accounting and improve their recognition of stressed assets. In addition, the implementation of the Insolvency and Bankruptcy Code has helped banks to recover a significant portion of their bad loans.
Moreover, the study highlights that the credit growth of the banking sector is expected to improve, as the economy picks up and the government’s thrust on infrastructure spending escalates. These factors will help to boost banks’ earnings and profitability, further reducing their gross NPAs.
The uplifting tide of resolution of stressed accounts and implementation of proactive measures by the government and the RBI, for example, initiation of the ‘Project Sashakt’, has significantly contributed to lowering the gross NPAs of banks. Project Sashakth is an inter-creditor agreement mechanism among the banks and financial institutions that has solved more than 20 cases of distressed banks and has resolved assets of more than INR 1 trillion (USD 13.45 billion). Projects like these help to improve the lending capacity of banks and, therefore, their asset quality.
The RBI’s Financial Stability Report (FSR) for the period ending in June 2021, also strengthens the arguments stating that the gross NPAs may decline from 7.5% in March 2021 to 6.2% by March 2022. This reduction in NPAs is expected to be seen across all bank groups, namely, public sector banks, private sector banks, and foreign banks operating in India.
The private sector banks, in particular, have shown resilient growth and higher asset quality compared to public sector banks. They have taken a more proactive approach to recognize and resolve stressed assets, coupled with an increase in retail loans, which have limited the impact of the pandemic on their balance sheets. Additionally, the capital-raising initiatives done by private sector banks recently have enhanced their capacity to lend and resolve bad loans.
The study suggests that public sector banks, which account for more than 60% of banking assets in India, are also expected to witness an improvement in asset quality on account of increased recoveries from the National Company Law Tribunal (NCLT) process and higher provision coverage. The NCLT process has been an effective mode of resolution for defaulting accounts under the insolvency and bankruptcy code. The recent revision of the IBC by the government favours a stricter timeline, providing a framework for faster resolution.
One of the major challenges that Indian banks have faced is the impact of the COVID-19 pandemic on asset quality. During the pandemic, the RBI announced a moratorium on loan repayments, which helped to ease the burden on borrowers. However, the moratorium also affected the ability of banks to recognize and resolve bad loans. As loan repayments resume, banks are expected to witness a rise in delinquencies in the short term. Nevertheless, this impact is expected to be limited, and recovery is expected to be swift as the economy reopens, and businesses improve.
In conclusion, Indian banks are showing positive signs of recovery, with their gross NPAs expected to drop below 4% by the end of the financial year 2023-24. This is a significant improvement from the past few years when the banking sector’s asset quality had deteriorated. The decline in gross NPAs is primarily due to moderation in slippages from good-quality assets and upgradation of stressed debts by banks.
The accumulation of provisions on NPAs for the banking sector has started to pay off, contributing to an improvement in profitability. The government’s thrust on infrastructure spending and the RBI’s Financial Stability Report indicates that the credit growth of the banking sector is expected to improve, further contributing to a reduction in gross NPAs.
The private sector banks have shown faster growth and higher asset quality compared to public sector banks. Public sector banks, however, are expected to witness improvements in asset quality due to increased recoveries from the NCLT process and higher provision coverage. While the COVID-19 pandemic has impacted the asset quality of banks, the resumption of loan repayments and recovery in businesses is expected to limit the impact. India’s banking sector outlook is positive and expected to continue to strengthen, with concerted efforts from the government and the RBI to ensure a stable environment.