The gross non-performing assets (NPAs) of commercial banks dropped to a seven-year low of 5% and the net NPA ratio contracted to a decade low of 1.3% in September 2022, the Reserve Bank of India (RBI) said in its Financial Stability Report (FSR).

 The report, released on Thursday, said buoyant demand for bank credit and early signs of a revival in the investment cycle are benefiting from improved asset quality, return to profitability, and strong capital and liquidity buffers of scheduled commercial banks (SCBs).

Decrease in slippages, increase in write-offs and pick up in credit growth contributed to the improvement in asset quality of banks.

“Reduction in slippages, or fresh accretions to NPAs, was a major contributor to the reduction in overall NPAs,” the report said.

“The declining tendency in the gross NPA ratio is likely to continue — under the baseline scenario of the stress testing framework, it is projected to fall further to 4.9% in September 2023,” it added.

 However, if the macroeconomic environment worsens to a medium or severe stress scenario, gross NPAs may rise to 5.8% and 7.8%, respectively.

 The stress tests conducted by the RBI showed banks were well capitalised and capable of absorbing macroeconomic shocks, even without any capital infusion by the stakeholders.

The tests assess capital ratios over a one-year horizon under a baseline and two adverse — medium and severe — scenarios.

CAR under stress tests

Under the baseline scenario, the aggregate capital adequacy ratio (CAR) of 46 major banks is projected to slip from 15.8% in September 2022 to 14.9% by September 2023.

The CAR may go down to 14% in the medium stress scenario and to 13.1% under the severe stress scenario by September 2023. However, it will still be well above the minimum capital requirement, including capital conservation buffer (CCB) requirements of 11.5%.

“None of the 46 SCBs would breach the regulatory minimum capital requirement of 9% in the next one year, even in a severely stressed situation, although nine SCBs may fall short of the minimum capital inclusive of CCB,” the report said.

According to the report, under the baseline stress scenario, the common equity tier-1 (CET1) capital ratio of select banks will fall by 70 basis points to 12.1% by September 2023 from 12.8% in September 2022.

In a severely stressed macroeconomic environment, the aggregate CET1 capital ratio would deplete only by 210 basis points, which would not breach the minimum regulatory norms.

“…all banks would be able to meet the minimum regulatory CET1 ratio plus CCB of 8 per cent over the next one year under all the three scenarios,” the RBI said.

Asset Quality

As per the report, the quarterly slippage ratio or fresh bad loans, which had been rising since December 2021, cooled off in Q2 of FY23, with considerable improvement recorded by public sector banks.

The provision coverage ratio (PCR), which has been rising steadily since March 2021, has reached 71.5% in September 2022 quarter. The PCR of private banks and foreign banks exceeded 75%.

The write-offs to gross NPA ratio increased during the first half of FY23 on an annualised basis to 22.6%, after declining for two consecutive years.

According to the report, the gross NPA of banks improved across most sectors, including the industrial sector. In the personal loans segment, the asset quality  bettered in the first half of FY23, especially for housing and vehicle loans.

The report said the combination of regulatory measures undertaken to cushion banks since the onset of the pandemic and banks’ own efforts in augmenting their capital base and reducing non-performing loans appear to have fortified their balance sheets. It added that banks have also managed their exposure to large borrowers well, with granularisation of loan books and reduction in asset impairment.

The share of large borrowers in gross advances of banks has been on a declining path. Their share in total gross NPA has dropped to 62.2% in September 2022 from 75.6% two years earlier. The gross NPA ratio of large borrowers fell to 6.4% in September 2022 from 10% in March 2021.

The share of the top 100 large borrowers in the total loan book of scheduled commercial banks grew to 17.4% in September 2022. Their asset quality also improved as their gross NPA fell to 5.4% in September 2022 from 6.8% in March 2022.

RBI Governor speaks of Indian economy’s resilience

RBI Governor Shaktikanta Das said in his foreword to the report that amid global shocks and challenges, the Indian economy presents a picture of resilience and the regulators are ready to take appropriate actions to preserve financial stability.

The international economic order stands challenged and financial markets are in turmoil because of monetary tightening in most parts of the world. “Amidst such global shocks and challenges, the Indian economy presents a picture of resilience. Financial stability has been maintained. Domestic financial markets have remained stable and fully functional. The banking system is sound and well-capitalised,” Das said.