Banks' bad loans to touch decadal low of 4% by March 2024

Riding on the post-pandemic economic recovery and higher credit growth, gross non-performing assets (GNPAs) of Indian banks are likely to improve 90 basis points (bps) to 5% this fiscal on-year, and another 100 bps to a decadal low of 4% by March 31, 2024, ratings agency CRISIL says in its latest report.

A key indicator of asset quality of the banking sector, the NPAs are set to decline in the coming months after their proposed sale to the National Asset Reconstruction Company Ltd (NARCL). NARCL is an asset reconstruction company (ARC), which has been set up by banks to aggregate and consolidate stressed assets for their subsequent resolution.

However, not all segments will perform equally well, says CRISIL, adding the biggest improvement will be seen in the corporate segment, where gross NPAs are seen falling below 2% next fiscal from a peak of 16% as on March 31, 2018.

Krishnan Sitaraman, who's senior director and deputy chief ratings officer at CRISIL Ratings, says the steady improvement in corporate asset quality is clearly reflected in leading indicators such as the credit quality of bank exposures.

The Reserve Bank of India's data, the GNPAs of commercial banks have declined from Rs 9,33,779 crore (GNPA ratio of 9.07%) as on March 31, 2019, to Rs 8,00,463 crore (GNPA ratio of 6.93%) as on September 30, 2021. The GNPAs of deposit-taking and non-deposit-taking NBFCs stood at Rs 1,91,413 crore (GNPA ratio of 6.87%).

A CRISIL study of large exposures of banks that constitute over half of corporate advances, shows the share of "high-safety" exposures has increased to 77% as on March 2022, from 59% in March 2017. At the same time, exposure to sub-investment grade companies over halved to 7% versus 17%.

The decline in bad loan exposure and improvement in asset quality in the corporate segment comes after a major clean-up of bank books in recent years. This has strengthened risk management and underwriting. It also led to increased preference for borrowers, with better credit profiles.

According to CRISIL, the retail segment remains resilient and gross NPAs are expected to remain rangebound at 1.8-2.0% over the medium term. The agriculture segment's gross NPAs are seen flat at 9-10%, following another year of reasonably normal monsoon and harvest.

For Covid-hit MSMEs, the gross NPAs may rise to 10-11% by March 2024 from 9.3% as on March 31, 2022. CRISIL finds that relief measures did help contain asset quality deterioration last fiscal, the segment saw the most restructuring at 6% compared with 2% for the overall banking sector. "About a fourth of these accounts could potentially slip into NPAs," says the ratings agency.

CRISIL also attributes mechanisms such as the Insolvency and Bankruptcy Code for supporting recoveries and increased credit discipline among borrowers. Apart from the IBC, the RBI and the government have taken several many steps to bring NPAs down. Some are asset quality review, prompt corrective action, proactive risk management, scale-based monitoring, the National Company Law Tribunal (NCLT) and Emergency Credit Lines Guarantee Scheme (ECLGS).