- The Reserve Bank of India (RBI) has reported a sharp decline in gross non-performing assets (NPAs), or bad loans, in the banking system in the last two years, but wilful defaults have shot up with more legacy loan accounts now getting added to the wilful default category.
- There has been a rise of 38.50% or Rs 94,000 crore, in wilful defaults in the last two years, reflecting the gaps in loan appraisals and risk management in the banking sector.
- According to the RBI’s ‘Report on trends and progress of banking’, overall NPAs have fallen from 7.3% (of total advances) in 2021 to 5% by September 2022. In absolute numbers, gross NPAs (which also include wilful defaults) of banks reduced by 19.5% to Rs 6.1 lakh crore as of December 31, 2022 as against Rs 7.5 lakh crore over a year ago.
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.
- 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.
- Wilful default: is deemed to have occurred if the borrower has defaulted in meeting their repayment obligations to the lender even when they have the capacity to honour the said obligations.
Impact of Non-Performing Assets:
Reasons For Declining NPAs:
- Drop in slippage ratio: The slippage ratio is the rate at which good loans are turning bad. It is the ratio of “Fresh accretion of NPAs during the year” to “Total standard assets at the beginning of the year”.
- The slippage ratio is 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.