Recently, the Reserve Bank of India (RBI) spotlighted that the Gross Non-Performing Assets (GNPA) ratio has hit a seven-year low at 5% in September 2022. Furthermore, this already impressive figure is projected to improve further down to 4.9% by September 2023. However, these positive predictions are subject to change if the macroeconomic environment suffers medium to severe stress. Under such stressful conditions, the GNPA ratio could increase to either 5.8% or even 7.8%.
Other Noteworthy Observations
In March 2022, the ratio of GNPA to gross advances was reported to be 5.9%. By September 2022, the Net Non-Performing Assets (NNPA) ratio had drastically improved, hitting a ten-year low of 1.3%. At this time, Private Sector Banks (PVBs’) NNPA ratio slipped under the 1% mark. Under a severe stress scenario, it’s predicted that GNPA ratios for Public Sector Banks (PSBs) may increase from 6.5% to 9.4% come September 2023. Additionally, PVBs’ GNPA ratio could rise from 3.3% to 5.8%, while Foreign Banks (FBs) may see an increase from 2.5% to 4.1%.
Forecast for Capital to Risk Weighted Assets Ratio
Under the baseline scenario, it is expected that the aggregate Capital to Risk Weighted Assets Ratio (CRAR) for major banks could decrease from 15.8% in September 2022 to 14.9% by September 2023. The Common Equity Tier-1 (CET1) capital ratio for some banks may also decline from 12.8% to 12.1% within the same period.
Key Terminologies Explained
GNPA refers to all loans defaulted by borrowers from a financial institution, while NNPA is the amount realized after deducting provision amounts from the GNPA. Macroeconomic conditions, which greatly influence a company or sector’s performance, involve aggregate production, spending, and price levels in an economy. The Capital Adequacy Ratio (CRAR) protects depositors while promoting the stability and efficiency of worldwide financial systems. This ratio measures a bank’s available capital as a percentage of its risk-weighted credit exposures. CET1 includes equity instruments with returns linked to the bank’s performance; these have no maturity date.
The Concept of Non-Performing Asset
A Non-Performing Asset (NPA) is a loan or advance in default or arrears on scheduled principal or interest payments. Banks classify NPAs further into three categories based on the duration of non-performance and the realisability of dues. These include Sub-standard Assets (NPA for less than or equal to 12 months), Doubtful Assets (NPA for more than 12 months), and Loss Assets (loans with losses identified by the bank, auditor, or inspector that must be fully written off).
This article provides insights into the governance of public sector banking in India, including recent trends, forecasts, and key terminologies. While the current outlook is generally positive, it’s important to note that changes in the macroeconomic environment could affect these forecasts.