Bad loans have been on the slide during the coronavirus pandemic year as banks have taken recourse to write-offs in a big way. 

The ratio of gross non-performing assets (GNPA) to advances for scheduled commercial banks has declined to 6.9% at end-September 2021 from 8.2% in March 2020 and 7.3% in March 2021, according to a new report by the Reserve Bank of India (RBI).

Lower slippages, partly due to the asset classification standstill, have also led to the improvement in the asset quality of banks during 2020-21. 

“As observed since 2018, write-offs were the predominant recourse for lowering GNPA in 2020-21,” the RBI said in its ‘Trend and Progress of Banking in India 2020-21’ report.

The gross NPA figure of 6.9% in September, in fact, is the lowest in five years, after peaking at 11.5% in March 2018.

In absolute terms, gross NPAs fell to Rs 8,37,771 crore in March 2021 from Rs 8,99,803 crore in March 2020. While NPAs worth Rs 4 lakh crore were added during the year, bad loans of Rs 2.08 lakh crore were written off by banks. Of the total NPAs, Rs 6.16 lakh crore in bad loans were accounted for by public sector banks, the RBI report said.

With the decline in delinquent assets, the provision requirements also dropped and the net NPA ratio of PSU banks and private banks eased from the previous year. On the contrary, foreign banks reported increasing accretions to NPAs and deteriorating asset quality due to amalgamation of troubled private banks and foreign banks, the RBI said.

While asset quality improved, the standard restricted advances increased to 0.8% in March 2021 from 0.4% a year ago.

Restructured standard advances further rose to 1.8% at end-September 2021 due to restructuring scheme 2.0 for retail loans and MSMEs (micro, small and medium enterprises) which does not entail an asset classification downgrade, the RBI report said.

The RBI cautioned that incipient stress remains in the form of higher restructured advances. Banks would need a higher capital cushion to absorb potential stress as well as to augment credit flow when policy support is phased out.

As on September 30, 2021, all public sector banks and private banks maintained the capital conservation buffer (CCB) well over the minimum requirement of 2.5%.

During 2020-21, the consolidated balance sheet of banks expanded in size, notwithstanding the pandemic and the resultant contraction in economic activity. “In 2021-22 so far, nascent signs of recovery are visible in credit growth. Deposits grew by 10.1% at end-September 2021 as compared to 11% a year ago,” the RBI said.

Some pandemic-led policy measures taken by the RBI reached the pre-announced sunset dates in 2020-21. “Certain liquidity measures have been wound down as a result, while other regulatory measures, including deferment of implementation of net stable funding ratio (NSFR), restrictions on dividend payouts by banks, deferment of implementation of the last tranche of capital conservation buffer, have been realigned to avoid extended forbearance and risks to financial stability while providing targeted support to needy sectors," the RBI report said.

The return on assets (RoA) of scheduled commercial banks improved to 0.7% in March 2021 from 0.2% a year ago. This was aided by stable income and decline in expenditure, the RBI report said. 

The report said capital to risk weighted assets (CRAR) ratio of banks strengthened from 14.8% at end-March 2020 to 16.3% at end-March 2021 and further to 16.6% at end-September 2021. This was partly helped by higher retained earnings, recapitalisation of public sector banks (PSBs) and capital raising from the market by both PSBs and private sector banks.

The RBI said even though initiation of fresh insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) was suspended for a year till March 2021, it constituted one of the major modes of recovery in terms of amount recovered.

As per the RBI report, the share of large borrowal accounts (exposure of Rs 5 crore or more) in total advances declined to 51% at end-March 2021 from 54.2% a year ago. Their contribution to total NPAs also declined in tandem from 75.4% to 66.2% during the same period.

The special mention accounts-2 (SMA-2) ratio, which signals impending stress, has risen across bank groups since the outbreak of the pandemic, the report said.

The balance sheet growth of urban co-operatives banks in 2020-21 was driven by deposits, while subdued credit growth led to acceleration in investments. Their financial indicators, including capital position and profitability, improved. The profitability of state co-operative banks and district central co-operative banks improved in 2019-20, while their asset quality deteriorated, the report said.

The consolidated balance sheet of non-banking financial companies (NBFCs) expanded during 2020-21, driven by credit and investments of non-deposit taking systemically important NBFCs. Their asset quality and capital buffers also improved, the RBI said.