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Banks’ Gross NPA ratio falls
Context:
Asset quality of commercial banks improved, with Gross Non-Performing Asset (GNPA) ratio falling to a 12-year low of 2.8% in March 2024 from 3.2% in September 2023.
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- The net NPA ratio decreased to 0.6% from 0.9% during the same period, according to the Reserve Bank of India (RBI) biannual Financial Stability Report.
- GNPA ratio might improve to 2.5% by March 2025 under the baseline scenario.
Non Performing Assets:
- It is a loan or advance for which the principal or interest payment remains overdue for a period of 90 days.
- Concerns Causing NPAs:
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- Economic Factors: Downturns, recessions, and industry-specific challenges lead to borrower defaults.
- Mismanagement: Poor corporate governance and financial mismanagement in borrowing companies.
- Policy-Related Factors: Government policy changes, regulatory shifts, and project approval delays impact loan repayment.
- External Shocks: Natural disasters, global economic crises, or geopolitical events hinder repayment.
- RBI’s Report on Trend and Progress of Banking in India (RTP) noted the Indian banking system’s vulnerability to global economic slowdown and trade collapse contributing to NPAs.
- Economic Survey 2020-21: It highlighted that undercapitalized banks reduced lending to good borrowers and increased lending to zombie borrowers.
- This, alongside ever-greening of loans, indicates poor governance with inattentive bank boards and ineffective auditors.
- RBI stated that NPAs were also driven by aggressive lending practices, willful defaults, loan frauds, fund diversion, and corruption.
Banking Sector Performance
- Capital positions, asset quality, and profitability continued to improve amid robust business expansion.
- Public Sector Banks (PSBs) saw a substantial reduction in the GNPA ratio by 76 basis points in H2 FY24.
- The provision coverage ratio rose to 76.4% in March 2024, driven by extensive provisioning by PSBs and foreign banks.
- Capital to Risk-Weighted Assets Ratio (CRAR) of scheduled commercial banks was 16.8%, & Common Equity Tier-1 Ratio (CET1) was 13.9% as of March 2024.
- Stress test results show that banks are well-capitalised and can absorb macroeconomic shocks even without further capital infusion.
- Under baseline scenario, aggregate CRAR is projected to decline to 16.1% by March 2025. Under severe stress, it may drop to 13%, still above minimum requirement.
Initiatives to Curb NPAs
- Asset Quality Review (AQR): The RBI conducted AQRs to uncover hidden NPAs, enhancing transparency in banks’ balance sheets.
- Prompt Corrective Action (PCA): It enforces corrective measures on banks with high NPAs to improve their capital adequacy and risk management.
- The RBI’s 12 February 2018 circular empowered banks to initiate insolvency proceedings and set a 180-day resolution timeline.
- Insolvency and Bankruptcy Code (IBC): Introduced in 2016, the IBC aims to expedite the NPA resolution process and improve recovery rates.
- Mission Indradhanush, initiated by the PJ Nayak committee, aimed to revamp PSBs so that they can compete with private sector banks.
- The government implemented a 4 R’s strategy, recognizing NPAs transparently, Resolving and Recovering value from stressed accounts, Recapitalizing PSBs, and Reforming the financial ecosystem for a responsible system.