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Home / News / India /  Will we see another surge of bad loans?

Will we see another surge of bad loans?

Reuters 

The central bank’s latest Financial Stability Report (FSR) said gross non-performing assets (GNPAs) might cross 8% by September 2022 in a baseline scenario, and hit 9.5% under severe stress. However, if stress conditions do not emerge, GNPAs may moderate. Mint explores:

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How do bank loans get categorized as NPAs?

How do bank loans get categorized as NPAs?

The FSR released last week showed that GNPAs of scheduled commercial banks (SCBs) stood at 6.9% at the end of September 2021, against 7.5% in March 2021. A loan or an advance which ceases to generate income for the bank, i.e. for which the interest or instalment of principal has been overdue for over 90 days, is classified as a non-performing asset, or NPA. However, in the wake of the covid-19 pandemic, as a relief measure, the central bank offered a loan moratorium scheme, which allowed late payment of interest. Loan write-offs have also aided in lowering GNPAs in 2020-21.

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The FSR released last week showed that GNPAs of scheduled commercial banks (SCBs) stood at 6.9% at the end of September 2021, against 7.5% in March 2021. A loan or an advance which ceases to generate income for the bank, i.e. for which the interest or instalment of principal has been overdue for over 90 days, is classified as a non-performing asset, or NPA. However, in the wake of the covid-19 pandemic, as a relief measure, the central bank offered a loan moratorium scheme, which allowed late payment of interest. Loan write-offs have also aided in lowering GNPAs in 2020-21.

What’s the sector-wise loan servicing trend?

The GNPA ratio for personal loans was higher at 2.5% in September, against 2.1% in March. The fallout was an outcome of deterioration witnessed in housing and auto sectors. On the other hand, industrial sector GNPA saw a decline to 9.9% in September 2021 as against 11.3% in March 2021. However, sectors such as food processing, chemical, and infra-structure (inclusive of electricity) were exceptions, witnessing an increase from March levels. GNPA for agricultural sector also grew marginally, and was 10.2% as against 9.8% in March 2021, while services were at 6.7% in September as against 7.5% in March.

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What is the trend in  bad loans?

In emerging markets, NPAs peak 6-8 quarters after the onset of a severe recession. While GNPA for public sector banks was 8.8% in September, private sector banks fared better with GNPA at 4.6% in September. However, the annual slippage ratio showed that in H1 of FY22, private banks had a higher deterioration rate at 4.4%, against 3.3% for PSBs.

How was an adverse impact avoided?

The July 2020 FSR, following the coronavirus outbreak, said the GNPA ratio could rise to 12.5% in March 2021 in a baseline scenario and to 14.7% under severe stress. However, regulatory and other policy support measures helped mitigate much of the adverse impact, bolstered bank resilience and strengthened credit availability for investment purposes. On the flip side, restructuring of entities under the Resolution Framework and loan moratorium could result in more trouble emerging later.

How is it relevant for the economy?

Adherence to NPA norms is crucial not only from the point of view of financial stability of the banking institutions, but it also impacts their credibility among depositors. Better loan servicing leading to NPAs getting reduced results in improvement in banks’ liquidity. Improved liquidity, in turn, help facilitate more productive economic activities. Besides, financial stability would also mean better utilization of taxpayers’ money. 

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Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.