The Indian banking sector has shown remarkable improvement in asset quality, with a significant reduction in Non-Performing Assets (NPAs), according to CareEdge Ratings. As of June 30, 2024, scheduled commercial banks (SCBs) reported a 24.9% year-on-year decline in Net Non-Performing Assets (NNPAs), bringing the figure down to Rs 1 lakh crore.
The data reflects the robust performance of the sector, especially private sector banks (PSBs), which have been instrumental in driving this positive change.
The improvement comes at a time when economic uncertainties, including global monetary tightening, volatile crude oil prices, and fears of a global slowdown, could pose challenges to the sustainability of this trend.
Despite these risks, the sector’s outlook remains optimistic, bolstered by strong credit demand and government-backed initiatives.
Significant Decline in NPAs Driven by Private Sector Banks
The Indian banking sector has successfully reduced its NNPAs, bringing the level down by 24.9% year-on-year as of June 2024.
This steep decline is a reflection of the ongoing efforts to clean up bank balance sheets and strengthen asset quality. The total value of NNPAs for scheduled commercial banks now stands at Rs 1 lakh crore, a major improvement when compared to previous years.
Private sector banks, in particular, have been pivotal in driving this reduction. These banks have managed to lower their incremental provisioning levels, a direct result of improved asset quality. Their diligent efforts to manage risk and maintain loan portfolios have significantly contributed to the overall health of the sector.
This decline in NPAs marks a notable achievement for the banking industry, especially considering the economic uncertainties at both the domestic and global levels. Elevated crude oil prices and fears of a global economic slowdown continue to loom, but the improved asset quality of Indian banks is a positive indicator of the sector’s resilience.
Impact of RBI’s Proposed Norms and Future Credit Costs
Despite the improvements, the Indian banking sector may face additional challenges in the near future. The Reserve Bank of India’s (RBI) proposed provisioning norms for projects under construction could lead to a rise in credit costs for scheduled commercial banks.
Public sector banks are projected to experience a 0.2% increase in credit costs between FY25 and FY27 due to these new norms, while private sector banks could see a 0.1% rise in the same period.
The central bank’s proposed changes aim to address potential risks associated with under-construction projects, ensuring that banks maintain adequate provisions to cover these risks. While this may lead to higher credit costs in the short term, it is expected to safeguard the banking sector against future shocks.
Nevertheless, external factors such as global monetary tightening and elevated crude oil prices could exacerbate these challenges. Should these risks materialize, banks may face downward pressure on their asset quality and profitability.
The sector’s ability to maintain its current trajectory will largely depend on how these economic factors evolve in the coming quarters.
Strong Credit Growth and Government Initiatives Support Positive Outlook
Despite potential headwinds, the Indian banking sector continues to show strong credit growth. In the first quarter of FY25, credit offtake grew by an impressive 18.1% year-on-year. This growth has been supported by economic expansion, an increase in capital expenditure, and various government schemes aimed at boosting industrial output and investment.
One of the key drivers behind this growth is the Production Linked Incentive (PLI) scheme, which has incentivized companies to invest in manufacturing and infrastructure projects. As a result, the banking sector has seen increased demand for credit, particularly in sectors like manufacturing, infrastructure, and services.
The sector’s asset quality has now returned to pre-Asset Quality Review (AQR) levels, with the Gross NPA (GNPA) ratio standing at 2.8% and the NNPA ratio at 0.6%. These figures highlight the banking sector’s recovery from the asset quality challenges of previous years.
While the outlook remains positive, external economic factors and the implementation of RBI’s proposed provisioning changes may influence the future trajectory of asset quality. In the meantime, the strong credit offtake and government-backed initiatives are likely to continue driving growth in the banking sector, supporting a favorable outlook for the near term.
The Indian banking sector’s sharp decline in NPAs, particularly NNPAs, is a testament to the sector’s ongoing improvement in asset quality. Private sector banks have played a crucial role in this development, and their ability to manage risks has significantly reduced the burden of non-performing loans on the industry. However, the challenges posed by the RBI’s new provisioning norms and external economic risks cannot be overlooked.
Looking ahead, the sector’s success will depend on its ability to balance strong credit demand and government initiatives with emerging challenges like rising credit costs and volatile global economic conditions. As the sector navigates these complexities, maintaining asset quality will be critical to sustaining its positive momentum in the future
