Banks' gross NPA ratio hits multi-year low of 2.8%

The gross non-performing assets (GNPA) ratio of India’s scheduled commercial banks has fallen to a multi-year low of 2.8%, according to the Reserve Bank of India’s (RBI) financial stability report.

Banks’ net non-performing assets (NNPA) ratio also fell to a multi-year low of 0.6%.

This has helped banks maintain strong capital buffers: their capital to risk-weighted assets ratio (CRAR) and the common equity tier 1 (CET1) ratio at 16.8% and 13.9%, respectively, stood well above the regulatory minimum in March 2024, the RBI says.

Indian banks have been boosted by rising profitability and declining non-performing assets. Return on assets (RoA) and return on equity (RoE) are close to decadal highs at 1.3% and 13.8%, respectively, the half-yearly financial stability report shows.

The CRAR of urban co-operative banks (UCBs) inched up to 17.5% in March 2024 while that of non-banking financial companies (NBFCs) declined marginally to 26.6%, both remaining well in excess of the prescribed regulatory minimum, the report reveals.

The consolidated solvency ratio of the insurance sector remains above the minimum threshold limit of 150%.

Stress tests on mutual funds and clearing corporations attest to the resilience of these segments of the financial sector.

Strong macroeconomic fundamentals and a sound and stable financial system have supported the sustained expansion of the Indian economy, the report says.

“Moderating inflation, a strong external position and ongoing fiscal consolidation are anchoring business and consumer confidence. Domestic financial conditions are buttressed by healthy balance sheets across financial institutions, marked by strong capital buffers, improving asset quality, adequate provisioning and robust earnings,” it adds.

In the most recent systemic risk survey (SRS), carried out in May 2024, all major risk groups to domestic financial stability were categorised as ‘medium’. “Respondents expressed optimism about the soundness of the domestic financial system. Survey participants felt that risks from global spillovers have receded, with around one-third showing higher confidence in the Indian financial system. The main near-term risks identified by respondents were geopolitical risks, tightening of global financial conditions, and capital outflows,” the report says.

Consumer credit – a major driver of banking business over the last decade – remained robust during the second half of FY24. Credit inquiry volumes differed across product categories: while inquiries for housing loans and loans against property categories rose, volumes in auto loans, credit card and personal loan categories moderated, the report shows.

Even as inquiry volumes remain robust, the impact of increase in risk weights on certain segments of consumer credit pulled down the rate of growth in overall consumer credit, especially personal loans and credit cards, it says.

In the consumer credit segment, there are a few concerns that require close monitoring, according to the RBI. “First, delinquency levels among borrowers with personal loans below ₹50,000 remain high. In particular, NBFC-Fintech lenders, which have the highest share in sanctioned and outstanding amounts, also have the second highest delinquency levels, only below that of small finance banks. Second, Vintage delinquency, which is a measure of slippage, remains relatively high in personal loans at 8.2%. Third, little more than a half of the borrowers in this segment have three live loans at the time of origination and more than one-third of the borrowers have availed more than three loans in the last six months,” cautions the banking regulator.