GNPAs hit 3.7% in Q1 of FY24 as against 5.1% levels before AQR. The review had seen GNPAs rising to over 7% as bad loans tumbled out of banks’ closets. Likely to fall to 2.90%-3.05%.
The gross non-performing assets (GNPA) ratio of scheduled commercial banks has reached pre-asset Quality Review (AQR) levels in Q1FY24.
Gross Non-Performing Assets (GNPAs) of Scheduled Commercial Banks (SCBs) reduced to 3.7% as of June 30, 2023, from 5.7% over a year ago.
The AQR
The then Reserve Bank of India governor Raghuram Rajan started the Asset Quality Review (AQR) of banks in July 2015, which forced banks to stop ever-greening loans and owe up their bad loans. Gross NPAs had shot up to over Rs 9 lakh crore during the period of Rajan’s AQR (2015 to 2017-18). After the AQR, the banks’ gross non-performing assets sharply jumped to 7.6% per cent in March 2016 from 5.1% in September 2015.
The GNPA ratio of SCBs reduced by 25.6% y-o-y to Rs 5.32 lakh crore as of June 30, 2023, due to lower slippages, steady recoveries & upgrades and writeoffs.
Non-performing assets (NNPAs) of SCBs reduced by 34.7% y-o-y to Rs. 1.25 lakh crore as of June 30, 2023. The NNPA ratio of SCBs reduced to 0.9% from 1.6% in Q1FY23 which is an all-time low.
The reasons
This trend of falling is expected to continue in FY24 due to several factors, including healthy growth in advances driven by an uptick in economic activities, lower incremental slippages, and a reduction in restructured portfolios, according to CareEdge Ratings.
Hence, the SCB GNPA ratio could improve to 2.90%-3.05% by FY24 end, it said. NNPA ratio is at a record low at 0.9% as of June 30, 2023, and is likely to trend even lower in the next few quarters as PSBs continue to report improved asset quality figures. Further SCBs also maintain a substantial buffer for provisions, which also creates a somewhat benign credit cost environment. Due to the sharp growth trends, the performance of unsecured loans also remains a key monitorable along with the MSME segment. Downside risks include an increase in crude oil prices, global
economic slowdown, global monetary and liquidity tightening, and elevated interest rates.
Credit offtake experienced robust growth of 16.2% in Q1FY24 and the outlook remains positive for FY24, driven by economic expansion, increased capital expenditure, the implementation of the PLI scheme, and a push for retail credit. The credit growth is likely to be in the range of 13.0%-13.5% for FY24, excluding the impact of the merger of HDFC with HDFC Bank.
SCBs’ credit cost (annualised) declined by 16 basis points (bps) y-o-y to 0.52% in Q1FY24. Besides, it has been generally trending down from 1.44% in Q4FY21.
PSU banks strong
Public Sector Banks (PSBs) have been holding substantial buffers for provisions over the last 6-8 quarters along with continuous improvement in the asset quality required a lower level of incremental provisioning, resulting in lower credit cost.
Restructured assets for select 10 PSBs reduced by 22.4% y-o-y to Rs. 0.97 lakh crore as of June 30, 2023.
Meanwhile, restructured assets of select six Private Banks (PVBs) declined by 48.5% to Rs. 0.17 lakh crore due to repayments made by the borrowers, an uptick in the economic activities and also slipping some accounts into the NPAs. Restructured assets (Ten PSBs + Six PVBs) as a percentage of net advances stood at 1.0% as of June 30, 2023, dropping by 60 bps over a year ago period.
Provision Coverage Ratio (PCR) of SCBs expanded by 326 bps y-o-y to 76.5% Q1FY24 mainly due to improvement in overall asset quality and aggressive provisioning for non-performing assets on the books.
