Asset quality in the banking system has improved over the last year, aided by an increase in economic activity. Bad loans fell by 185 basis points to 5.7 per cent of total loans, but concerns about restructured credit remain.
According to data compiled by Bank of Baroda research, the banking system’s non-performing asset (NPA) ratio has steadily declined from 7.5 per cent in the first quarter of FY22 to 5.7 per cent in the first quarter of the current fiscal year.
The NPA ratio of public sector banks has fallen from 9.4 per cent in June 2021 to 7.2 per cent, a 220 basis point decrease, while private banks’ NPA ratio has fallen by 110 basis points, from 4.2 per cent to 3.1 per cent in the same period. One basis point equals one hundredth of a percentage point.
To be sure, the data for state-owned banks includes IDBI Bank, which was reclassified as a private sector lender in 2019 after Life Insurance Corporation of India (LIC) purchased a 51 per cent stake in the bank.
State Bank of India (SBI), India’s largest lender, saw a 141-bps decrease in gross NPA ratio in the June quarter and said it made adequate provisions to deal with uncertainties in the coming quarters.
“In terms of asset quality, we do not see any challenge. Our gross NPAs and net NPAs have come down, and we have adequately provided for the stress which is there in our book,” said Dinesh Khara, chairman of SBI.
Analysts anticipate a downward trend in bad loans in the coming quarters. S&P Global Ratings projected that bad loans in India’s banking sector would fall to 5 per cent-5.5 per cent of gross loans by 31 March 2024 in its Global Banking Outlook—Midyear 2022, which was released on July 21. Credit costs are expected to stabilise at 1.5 per cent in FY23 and then normalise to 1.3 per cent, making them comparable to those of other emerging markets and India’s 15-year average.