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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.
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.
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.
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.
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.
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.
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.
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.
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.
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 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.
By: Shubham Tiwari ProfileResourcesReport error
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