The Reserve Bank of India (RBI) has asked banks to monitor slippages in their restructured assets even as gross NPA ratio declined in the last fiscal.

After the outbreak of Covid-19, the RBI had introduced two restructuring schemes. While the first one was for corporate borrowers with deadline of December 2020, the second scheme, introduced in May 2021 and revised, was targeted specifically for MSMEs.

The RBI, in its ‘Trend and Progress of Banking in India 2021-22’ report, also said that banks must ensure due diligence and robust credit appraisal to limit credit risk.

Despite banks reporting high capital buffers and enjoying double-digit growth in their balance sheets, the RBI said that the uncertainties characterising fast-changing macroeconomic scenarios amidst formidable global headwinds during 2022-23 could pose new challenges to the banking sector.

“If downside risks materialise, asset quality could be affected. Hence, slippages in restructured assets need to be monitored closely. Timely resolution of stressed assets is essential to prevent asset value depletion,” the report said.

As per the RBI report, the number of accounts restructured by private sector banks (PVBs) through both resolution frameworks 1.0 as well as 2.0 grew multi-fold, albeit on a low base. In contrast, public sector banks (PSBs) had restructured fewer accounts under resolution framework 1.0, but they picked up steam in resolution framework 2.0.

PSBs restructured around 10 lakh accounts in 2021-22 compared to 3 lakh accounts in 2020-21. The private sector lenders restructured close to 45 lakh accounts in 2021-22 as against 2 lakh accounts in 2020-21, the report showed.

The RBI further said the gross non-performing assets (GNPA) ratio of scheduled commercial banks (SCBs) has been declining sequentially to reach 5% in end-September 2022 from 5.8% in 2021-22.

“This decrease was led by lower slippages as well as reduction in outstanding GNPAs through recoveries, upgradations and write-offs,” the report said. The net NPAs eased to 1.7% in 2021-22 from 2.4% in 2020-21 in the previous financial year.

In 2021-22, the reduction in NPAs was mainly contributed by written-off loans in the case of PSBs, while the upgradation of loans was the primary driver for asset quality improvement for PVBs. 

Large borrowal accounts, i.e., accounts with a total exposure of Rs 5 crore and above, comprised 47.8% of total advances in 2021-22, down from 48.4% in 2020-21. Their share in total NPAs declined during the year to 63.4% from 66.4% in 2020-21.

The Reserve Bank said with global growth set to deteriorate in 2022 and rising prospects of a recession in 2023, credit growth could ‘procyclically’ decelerate across major economies. This, in turn, could shrink bank profitability.

The RBI also pointed out on subdued deposit growth. “Household financial saving rates declined to a five-year low in 2021-22, which was also reflected in subdued deposit growth.  The transmission of the 190 basis points (bps) increase in the repo rate during May-October 2022 to deposit rates is likely to provide a fillip to deposit growth rates," it said. 

On the balance sheet of banks, the RBI said that despite some recent moderation, public sector banks still have the lion’s share. At end March 2022, they accounted for 62% of total outstanding deposits and 58% of total loans and advances extended by scheduled commercial banks, the report said.