The Reserve Bank of India (RBI) on Tuesday said commercial banks managed to lower their bad loans, or non-performing assets (NPAs), largely driven by loan write-offs and warned that the asset quality of the banking system may deteriorate sharply in the coming months due to the uncertainty induced by Covid pandemic.
Commercial banks in India managed to bring down their NPAs to 7.5 per cent of advances as of September 2020 from 8.2 per cent in March 2020 and 9.1 per cent in March last year. Banks wrote off a record Rs 237,876 crore in fiscal 2019-20, enabling the banks to show lower NPAs, the RBI said in its ‘Report on trend and progress of banking in India 2019-20’. The central bank has warned that the modest NPA ratio of 7.5 per cent at end-September 2020 “veils the strong undercurrent of slippage”. The accretion to NPAs as per the Reserve Bank’s Income Recognition and Asset Classification (IRAC) norms would have been higher in the absence of the asset quality standstill provided as a Covid-19 relief measure. The RBI had allowed six months moratorium on loan repayments due to the Covid impact. “Given the uncertainty induced by Covid and its real economic impact, the asset quality of the banking system may deteriorate sharply, going forward,” the RBI report said.
In absolute terms, gross NPAs declined to Rs 899,803 crore in March 2020 from Rs 936,474 crore in March 2019. “NPAs older than four years require 100 per cent provisioning and, therefore, banks may prefer to write them off. In addition, banks voluntarily write-off NPAs in order to clean up their balance sheets, avail tax benefits and optimise the use of capital,” the RBI said. “At the same time, borrowers of written-off loans remain liable for repayment,” it said. PSU banks wrote off loans worth Rs 178,305 crore in 2019-20 while private banks had written off Rs 53,949 crore, the RBI report said. Banking sources said very little is known about the identity of the borrowers and the amount written off in the case of individual borrowers. While banks claim that the recovery measures continue even after loans are written off, sources said not more than 15-20 per cent is recovered and the write-off figures every year are rising, much faster than recoveries and recapitalisation. What’s disturbing banking observers is that banks made additions of Rs 378,228 crore to NPAs in March On the other hand, reduction in NPAs was much lower at Rs 155,905 crore during the year.
The central bank’s report has warned that an increase in the restructured advances ratio to 0.43 per cent at end-September 2020 from 0.36 in March 2020 may be “indicative of incipient stress”.
The RBI said the rapid credit growth during 2005-12, coupled with absence of strong credit appraisal and monitoring standards and wilful defaults are responsible for sizeable asset impairments in subsequent years. “Large borrowal accounts (exposure of Rs 5 crore and above) constituted 79.8 per cent of NPAs and 53.7 per cent of total loans at end September 2020,” it said, adding: “The share of special mention accounts (SMA-0) saw a sharp rise in September 2020”.