Trend and Progress of Banking in India

What’s in Today’s Article?

• Why in News?
• What are Non-Performing Assets (NPAs)?
• Comprehensive Measures by the Government and RBI to Reduce NPAs
• Highlights of the ‘Trend and Progress of Banking in India’ Report

Why in News?

• The Gross Non-Performing Assets (GNPA) ratio of Indian scheduled commercial banks (SCBs) went on improving in the 2nd quarter of this financial year.
• According to the Reserve Bank of India’s (RBI’s) report titled ‘Trend and Progress of Banking in India’, the GNPA ratio of SCBs fell to a decadal low of 3.9% at end-March 2023 and further to 3.2% at end-September 2023. 

What are Non-Performing Assets (NPAs)?

• Definition: A NPA is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
  • For banks, a loan is an asset because the interest paid on these loans is one of the most significant sources of income for the bank.
  • When customers, retail or corporates, are not able to pay the interest, the asset becomes ‘non-performing’ for the bank because it is not earning anything for the bank.
  • Therefore, the RBI has defined NPAs as assets that stop generating income for banks.
  • Banks are required to make their NPAs numbers public and to the RBI as well from time to time.
• Classification of assets: As per the RBI guideline, banks are required to classify NPAs further into -
  • Substandard assets: Assets which have remained NPA for a period less than or equal to 12 months.
  • Doubtful assets: An asset that has remained in the substandard category for a period of 12 months.
  • Loss assets: It is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some recovery value.
• NPA Provisioning: Provision for a loan refers to a certain percentage of loan amount set aside by the banks.
  • The standard rate of provisioning for loans in Indian banks varies from 5-20% depending on the business sector and the repayment capacity of the borrower.
  • In the cases of NPA, 100% provisioning is required in accordance with the Basel-III norms.
• GNPA and NNPA: There are primarily two metrics that help us to understand the NPA situation of any bank.
  • GNPA: It is an absolute amount that tells about the total value of gross NPAs for the bank in a particular quarter or financial year as the case may be.
  • NNPA: Net NPAs subtracts the provisions made by the bank from the gross NPA. Therefore, net NPA gives the exact value of NPAs after the bank has made specific provisions for it.
• NPA Ratios: NPAs can also be expressed as a percentage of total advances. It gives us an idea of how much of the total advances is not recoverable. For example,
  • GNPA ratio is the ratio of the total GNPA of the total advances.
  • NNPA ratio uses net NPA to find out the ratio to the total advances.

Comprehensive Measures by the Government and RBI to Reduce NPAs

• Government has implemented a comprehensive 4R’s strategy, consisting of -
  • Recognition of NPAs transparently,
  • Resolution and recovery of value from stressed accounts,
  • Recapitalisation of PSBs, and
  • Reforms in PSBs and the wider financial ecosystem for a responsible and clean system.
• Change in credit culture has been effected, with the Insolvency and Bankruptcy Code 2016 (IBC) - fundamentally changing the creditor-borrower relationship.
• The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 has been amended to make it more effective.
• National Asset Reconstruction Company Limited (NARCL) has been set up as an asset reconstruction company with an aim to resolve stressed assets above Rs. 500 crores.
• PSBs have also created Stressed Asset Management Verticals for stringent recovery, segregated pre-and post-sanction follow-up roles for clean and effective monitoring.
• The RBI proposed that lenders should classify a borrower as a “wilful defaulter” within 6 months of their account being declared a NPA.

Highlights of the ‘Trend and Progress of Banking in India’ Report

• The GNPA ratio of SCBs fell to a decadal low of 3.9% at end-March 2023 and further to 3.2% at end-September 2023.
  • During 2022-23, about 45% of reduction in GNPAs of SCBs was contributed by recoveries and upgradations.
• The consolidated balance sheet of banks grew by 12.2% in 2022-23 - the highest in 9 years.
• The share of PSBs in the consolidated balance sheet of banks declined from 58.6% at the end of March 2022 to 57.6% at the end of March 2023, while private banks gained a share from 34% to 34.7%.
• At the end of March 2023, PSBs accounted for 61.4% of total deposits and 57.9% of total advances.
• With inflation remaining above target, monetary policy could stay in restrictive territory for longer.
• Given the increasing interconnectedness between banks and NBFCs, the latter should focus on broad-basing their funding sources and reduce overdependence on bank funding.
• The central bank has also raised concerns over banks’ lending to borrowers who can influence the lender’s decision as it involves moral hazard issues leading to compromise in pricing and credit management.
• The Indian banking system is well positioned to improve further, with better asset quality, high capital adequacy and robust profitability.
  • The financial indicators of NBFCs are also set to strengthen further.

Q1) What is the Insolvency and Bankruptcy Code 2016 (IBC)?

The IBC is an Indian law which creates a consolidated framework that governs insolvency and bankruptcy proceedings for companies, partnership firms, and individuals.

Q2) What is the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002?

The SARFAESI Act allows banks and other financial institutions to auction residential or commercial properties of defaulters to recover loans. The first asset reconstruction company (ARC) of India, ARCIL, was set up under this act.

Source: Asset quality of Indian banks improves to decadal high: RBI | ToI