Indian banks' gross NPA could fall to 4% by March 2024

Gross non-performing assets (NPAs) of Indian banks are expected to fall to a decadal low of 4 per cent by the end of fiscal 2023-24 from a peak of 11.5 per cent in March 2018, helped by a sharp improvement in the corporate segment even though the stressed loans to MSMEs are projected to remain elevated, an industry study showed.

NPAs in the corporate segment are estimated to fall to 2 per cent by the end of fiscal 2023-24 from a peak of 16 per cent as on March 31, 2018, according to a study conducted jointly by industry body Assocham and CRISIL Ratings.

For banks, gross NPAs are expected to decline by 90 basis points (bps) year-on-year to 5 per cent this fiscal, and by another 100 bps to a low of 4 per cent by March 31, 2024 riding on the post-pandemic economic recovery and higher credit growth. This will be the lowest gross NPA level of Indian banks since 2013 when it stood at 3.40 per cent.

As per the RBI data, the gross NPA of the Indian banks stood at 5.97 per cent in March 2022. The asset quality of the Indian banking sector started deteriorating from the early part of the last decade. The gross NPA of banks, which stood at 2.40 per cent in March 2011, surged to 11.50 per cent in 2018. The asset quality has improved gradually since 2018.

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“The twin balance sheet problem has largely been addressed, creating a situation where the credit growth has started to move up significantly,” said Assocham secretary general Deepak Sood.

“Our banking sector is quite robust even in the midst of continuing global challenges,” he said.

The improvement in asset quality of Indian banks has been led by a significant clean-up of books, strengthened risk management and underwritings.

In a bid to further ease the NPA problem the central government set up National Asset Reconstruction Company Ltd (NARCL) in 2021. NARCL, which is majority controlled by PSBs, proposes to acquire stressed loan assets above Rs 500 crore each amounting to about Rs 2 lakh crore in phases.

NPAs in the MSME segment, which suffered the most during the Covid-19 pandemic, are expected to rise to 10-11 per cent by March 2024 from about 9.3 per cent as on March 31, 2022.

While relief measures did help contain asset quality deterioration last fiscal, the MSME segment saw the most restructuring, at about 6 per cent, compared with 2 per cent for the overall banking sector.

The retail segment has maintained steady asset quality with gross NPAs expected to be range bound at 1.8-2.0 per cent over the medium term.

While the impact of higher interest rates and inflation on cash flows of individual borrowers will need to be monitored, almost half of the retail loans are home loans, where borrowers that banks cater to have relatively better credit profiles, the report noted.