Context: The Gross Non-performing Assets (GNPA) of the Indian banks are projected to see further improvement, potentially reaching up to 2.1 per cent by the end of the fiscal year 2025.

Key Findings

• According to a report, the Gross Non-Performing Assets (GNPA) of the Indian banking system are projected to further improve to up to 2.1 percent by the end of FY25.

• Care Ratings forecasts GNPA to range between 2.5-2.7 percent in FY24, with further improvement expected to 2.1-2.4 percent by FY25.

• However, the report highlights downside risks, including potential weakening in asset quality due to elevated interest rates, regulatory changes, and a tighter liquidity environment.

Impact of RBI’s Comprehensive Exercise

• The Reserve Bank of India (RBI) initiated a comprehensive exercise in the middle of the last decade, instructing banks to classify certain stressed assets as Non-Performing Assets (NPAs) to ensure accurate representation of balance sheets.

• This move led to a surge in GNPA to 11.2 percent in FY18 from 3.8 percent in FY14, primarily due to the Asset Quality Review (AQR) process of 2015-16.

Trend of Improvement in Asset Quality

• Since FY19, GNPAs have shown a consistent improvement, reaching a decadal low of 3.9 percent in FY23 and standing at 3 percent in the December quarter of FY24.

• Factors contributing to this improvement include recoveries, higher write-offs by banks, lower slippages, and the sale of distressed assets to asset reconstruction companies.

Sectoral Analysis of GNPA

• From a sectoral perspective, the GNPA ratio in agriculture reduced to 7 percent in September 2023 compared to 10.1 percent in March 2020.

• Similarly, the industrial sector reported a GNPA ratio of 4.2 percent in September 2023, significantly lower than 14.1 percent in March 2020 and 22.8 percent in March 2018.

• Industrial GNPAs declined due to corporate deleveraging, resolutions, and write-offs, although challenges persist in gems and jewelry and construction sub-sectors.

Retail Loan GNPA and Monitoring Challenges

• The retail loan GNPA stood at 1.3 percent in September 2023, down from 2 percent in March 2020. However, stress in this segment primarily arises from unsecured loans, credit card receivables, and education loans.

• The agency highlights the need for continued monitoring of unsecured personal loans and restructured accounts.

Comparison with Global Trends

• Despite the declining trend in GNPA, loss assets in India remain comparatively higher than in other countries.

• Advanced economies have maintained healthy asset quality due to continued deleveraging, institutional and government intervention, and active market practices to manage delinquent assets.

• While delinquencies in the European Union have reached their lowest levels since the global financial crisis, GNPA ratios remain relatively elevated in Russia.

About Non-Performing Asset (NPA)

• They are loans or advances that are in default or in arrears.

• In other words, these are those kinds of loans wherein principal or interest amounts are late or have not been paid.

• A NPA is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days. They can include various types of loans, such as personal loans, business loans, mortgages and credit card debt. 

• When the ratio of NPAs in a bank's loan portfolio rises, its income and profitability fall, its capacity to lend falls and the possibility of loan defaults and write-offs rise.

Types of NPAs: Different types of NPAs depend on how long they remain in the NPA category

• Sub-Standard Assets: An asset is classified as a sub-standard asset if it remains as an NPA for a period less than or equal to 12 months. 

• Doubtful Assets: An asset is classified as a doubtful asset if it remains as an NPA for more than 12 months.

• Loss Assets: An asset is considered a loss asset when it is “uncollectible” or has such little value that its continuance as a bankable asset is not suggested. However, some recovery value may be left in it as the asset has not been written off wholly or in parts.

NPA Provisioning

• Provisioning means an amount that the banks set aside from their profits or income in a particular quarter for non-performing assets, such as assets that may turn into losses in the future.

• It is a method by which banks provide for bad assets and maintain a healthy book of accounts. It is done according to which category the asset belongs.

• Gross non-performing assets (GNPA) and Net non-performing assets (NNPA): Banks are required to make their NPA numbers public and to the RBI from time to time. There are primarily two metrics that help us understand any bank's NPA situation.

• GNPA: GNPA is an absolute amount. It tells you the total value of gross non-performing assets for the bank in a particular quarter or financial year, as the case may be.

• NNPA: NNPA subtracts the provisions made by the bank from the GNPA. Therefore, net NPA gives you the exact value of non-performing assets after the bank has made specific provisions.

• The NNPA is a measure of the actual losses that a bank has incurred on its NPAs. A high NNPA indicates that a bank has incurred large losses on its NPAs.

Conclusion

• The analysis underscores the ongoing improvement in India’s banking sector regarding asset quality, with concerted efforts aimed at reducing NPAs across sectors.

• However, challenges persist, necessitating continuous monitoring and proactive measures to sustain the positive momentum and align with global standards of asset quality management.