With improving asset quality, the GNPA (gross non-performing asset) ratio of scheduled commercial banks (SCBs) is projected to improve from the expected 2.5-2.7 per cent in FY24 to 2.1-2.4 per cent by FY25 end, according to CareEdge Ratings.

This will be driven by moderation in slippages, elevated PCR (provision coverage ratio) levels resulting in lower incremental credit costs, corporate deleveraging leading to improved financials, some level of slippage from the retail book, a declining trend in the stock of GNPAs and sustained retail GNPA levels in spite of high levels of unsecured loans, the credit rating agency said in a report..

GNPA figures

At these levels, GNPA figures would have reached the long-term levels prior to the pre-AQR (asset quality review) levels, the agency said. Additionally, credit costs are estimated to remain benign.

“The performance of unsecured personal loans and restructured accounts continues to be monitorable....

“However, downside risks include any material weakening of asset quality due to elevated interest rates, impact of regulatory changes, a tighter liquidity environment and global issues, said Sanjay Agarwal, Senior Director; and Saurabh Bhalerao, Associate Director, in the report.

The authors noted that post the AQR in 2015-2016 which pushed banks to recognise NPAs and reduce unnecessary restructuring, banks witnessed a surge in GNPAs from 3.8 per cent in FY14 to 11.2 per cent in FY18 (and Net NPAs from 2.1 per cent in FY14 to 5.6 per cent in FY18) largely due to weakness in the wholesale advances which required banks to make a significant amount of provisioning and write-offs over the next four to five years.

Asset quality

The GNPA ratio of SCBs which has been on a downward trajectory since March 2019. The downward journey continued even during the pandemic period. In FY23, the SCBs GNPA ratio fell to 3.9 per cent, a decadal-year low. The asset quality has improved due to recoveries, higher write-offs by banks and much lower slippages, etc., per the report.

“The slippages have declined across bank groups in FY23 indicating lower accretion of fresh NPAs. During FY23, around 45 per cent of reduction in GNPAs was contributed by recoveries and upgradations.

“This reduction continued in FY24 and by the end of Q3FY24, the GNPA as well as the Net NPA ratios have touched 3.0 per cent and 0.7 per cent respectively,” per the agency’s analysis.

Balance sheets

Apart from write-offs and recovery through multiple resolution mechanisms, SCBs also cleaned up their balance sheets through sale of NPAs to ARCs.

“Among major sub-sectors within the industry, there was a broad-based improvement in the GNPA ratio. However, it continues to remain elevated for gems and jewellery and construction sub-sectors.

“The services and retail sectors reported 3.4 per cent and 1.3 per cent GNPA in September 2023 as compared with 7.2 per cent and 2.0 per cent reported in March 2020, respectively. Retail NPAs can largely be attributed to stress on unsecured loans, education, and credit card receivables,” the authors said.