Context: In the second quarter of 2019, the NPA ratio of Indian banks was 9.2% which was the worst among most emerging economies. However in the span of just four years, the GNPAs and Net NPAs have now reached their lowest levels since 2015 to 3.9% and 1%, respectively.
Basics of Bad Assets
- Non-Performing Assets (NPA): An asset that is not returning in the form of principal or interest during the last 90 reporting days is classified as NPA.
- Gross Non-Performing Assets (GNPA): GNPA is an absolute amount which reflects the total value of non-performing assets for the bank in a particular financial year.
- Net Non-Performing Assets (NNPA): NNPA subtracts the provisions made by the bank from the gross NPA. Hence, net NPA gives you the exact value of non-performing assets after the bank has made specific provisions for it.
- Return of Asset (RoA): RoA is calculated by dividing the net income of a bank by its total assets. An RoA of >=1% is generally considered good.
- Provisioning is a mechanism to deal with bad assets. Under provisioning, banks have to set aside some funds to a prescribed percentage of their bad assets. The percentage of bad assets that has to be ‘provided for’ is called provisioning coverage ratio. The provisioning coverage ratio is the percentage of bad assets that the bank has to provide for from their own funds – most probably from profit.
- Capital Adequacy Ratio (CAR) also known as capital-to-risk weighted assets ratio (CRAR) is defined as the proportion of a bank’s total assets that is held in the form of shareholders’ equity and certain other defined classes of capital. It is a measure of the bank’s ability to meet the needs of its depositors and other creditors. It is expressed as a percentage of a bank’s weighted credit exposures.
Facts that Shows the Decline in Stressed Assets
- This graph shows that GNPAs and Net NPAs continued to decline and in March 2023, reached 3.9% and 1%, respectively, the lowest levels since 2015.
- Chart above shows that the profitability of the banking sector has seen a marked improvement, with the Return on Assets (RoA) climbing to 1.1% in 2023, up from a negative 0.2% in 2018. An RoA of >=1% is generally considered good. This positive shift has contributed to the Capital to Risk-Weighted Assets Ratio (CRAR) hitting a record peak of 17.1% in 2023. A key indicator of a bank’s health is its capital position, especially its CRAR that measures the bank’s exposure to riskier loans.
- The graph above illustrates the ratio of write-offs to GNPAs, which had been on a consistent downward trend during 2020-21 and 2021-22. However, there was a rise in this ratio in 2022-23, primarily due to substantial write-offs by private sector banks.
- It shows the GNPA ratio of personal loans by category. The ratio has declined against all types of personal loans such as housing, credit cards, vehicle loans, and education loans.
Reasons For Declining NPAs
- The Insolvency and Bankruptcy Code helped the recovery of sick loans.
- Banks have stopped lending big money to industries and increased their share of personal loans.
- Drop in Slippage Ratio: The slippage ratio is the rate at which good loans are turning bad. It is measured by
Fresh accretion of NPAs during the year × 100
Total standard assets at the beginning of the year
- The slippage ratio was around 2% in September 2022 for SCBs, which is the lowest since 2015. Low slippage shows how well the asset qualities are managed by the bank.
- Increasing Write-offs: Banks voluntarily choose to write off NPAs to maintain healthy balance sheets. According to the data given by the finance ministry, banks had written-off bad loans worth ₹ 10,09,511 crore in the last 5 years. In the first half of FY 2022-23, the loan write-offs as a ratio of GNPAs increased to 22.6%.
These factors not only helped in reducing the share of bad assets but also increased the profitability of scheduled commercial banks in the last one year.
Hence, from the above analysis, we can conclude that the recovery of banks is consistent and their health continues to improve.