The banking sector was able to improve the quality of assets during the Covid year with the ratio of total non-performing assets to advances dropping from 8.2 percent at the end of March 2020 to 7.3 percent at the end of March 2021 – and then to 6.9 percent at the end of March end of September 2021, according to a report New issued by the Reserve Bank of India (RBI).
According to the “Report on Trend and Progress in Banking in India 2020-2021”, loan write-downs have been the predominant recourse to reduce total NAPs in 2020-2021. She said this improvement was also driven by lower slippage, in part due to the asset rating freeze.
In absolute terms, total NPAs decreased to Rs 8,37,771 crore in March 2021 from Rs 8,99,803 crore in March 2020. NPAs of Rs 4 crore were added during the year while bad loans of Rs 2.08 crore were written off from before the banks. Out of the total NPAs, Rs 6.16 lakh crore was in bad loans by public sector banks, the report said.
The ratio of total NAPs to advances indicates the proportion of loans out of total lending that have not been repaid during the period due. Usually banks write off non-performing assets when all recovery measures have been exhausted and the chances of recovery are remote.
In April 2020, when Covid hit the economy, the Reserve Bank of India (RBI) decided to provide relief to standard bank accounts to take advantage of the loan moratorium between March 1 and May 31 of that year. The 90-day NPA standard excluded the moratorium on such accounts. The Reserve Bank of India (RBI) has introduced an asset classification freeze for standard bank accounts, which means that they cannot be classified as bad assets after the stipulated 90-day period.
A red flag for asset quality
While bad loans decreased until September 2021, the Reserve Bank of India indicated that the asset quality of banks may decline. Credit growth – at 7.3 percent on December 3, 2021 – is also weak, indicating the impact of the pandemic on aggregate demand and banks’ risk aversion to lending to the productive sectors of the economy.
With delinquent assets lower, provisioning requirements have also decreased and the net NPA of PSU banks and private banks has softened from the previous year. By contrast, foreign banks have reported increased asset accumulation in the NPA and deteriorating asset quality due to the merger of troubled private banks and foreign banks, the RBI said.
In India, most pandemic measures had a well-defined expiration clause, and some have run their course during the year. However, the central bank said that the impact of these temporary measures on the financial health of banks can only be fully understood after the passage of time.
The fallout from the pandemic and slowdown in economic activity is that credit growth to banks remained subdued in 2020-2021 but non-bank financial firms (NBFCs) stepped up to fill this void. The Reserve Bank of India said that in the first half of 2021-22, although credit growth for banks showed some pickup, concerns about the asset quality of NBFCs arose.
However, going forward, banks will need a higher capital reserve to deal with challenges due to the ongoing pressure experienced by borrowers as well as to meet the potential credit requirements of the economy, according to the report.
Based on the capital position as on September 30, 2021, all public sector banks and private banks maintained a capital maintenance reserve (CCB) well above the required minimum of 2.5 per cent.
During the period 2020-2021, the consolidated balance sheet of banks expanded in size, despite the pandemic and the resulting contraction in economic activity. In 2021-22 so far, nascent signs of recovery are emerging in credit growth. Deposits grew by 10.1 per cent at the end of September 2021 compared to 11.0 per cent a year ago,” the Reserve Bank of India said.
The central bank said some policy measures taken by the Reserve Bank of India in response to the pandemic have reached the previously announced sunset dates of 2021-22.
He said that some liquidity measures were terminated as a result, while other regulatory measures were reorganized to avoid extended patience and risks to financial stability while providing targeted support to sectors in need. The realigned measures include the postponement of the implementation of the Net Stable Funding Ratio (NSFR), restrictions on dividends by banks and the postponement of the implementation of the last tranche of the capital preservation reserve.
Although the commencement of new insolvency proceedings under the Insolvency and Bankruptcy Act (IBC) was suspended for a year until March 2021, it constituted one of the main recovery methods in terms of the amount recovered.
The Reserve Bank of India said the share of large borrowing accounts (exposing Rs 5 crore or more) in total advances fell to 51 per cent at the end of March 2021 from 54.2 per cent a year earlier. Its contribution to the total national action plans decreased in tandem from 75.4 percent to 66.2 percent during the same period.
The report stated that the Special Account Signaling Ratio-2 (SMA-2), which indicates impending stress, has risen across bank groups since the outbreak of the pandemic.
The balance sheet growth of urban cooperative banks in 2020-2021 was driven by deposits, while weak credit growth led to an acceleration in investments. Its financial indicators, including capital position and profitability, have improved. The report said that the profitability of state cooperative banks and local central cooperative banks improved in 2019-20, while the quality of their assets deteriorated.
The consolidated balance sheet of NBFCs expanded during 2020-2021, driven by credit and investments from NBFCs-ND-SI. The Reserve Bank of India said the quality of their assets and capital buffers had also improved.