MUMBAI: The Reserve Bank of India (RBI) expects the gross non-performing assets (GNPA) ratio of banks to improve to 2.5% in FY25 after moderating to a 12-year low of 2.8% in FY24.
The system-wide net NPA ratio is also expected to improve further from 0.6%, which has almost halved from the previous fiscal year.
The record reduction in the bad loan ratio was led by state-run banks, which improved by 76 basis points (bps) to 3.7%.
While the GNPA stock fell across all bank groups, active and deep provisioning by state-run banks and foreign banks resulted in an improved provisioning coverage ratio of 76.4% in March 2024, the RBI stated in its biannual Financial Stability Report.
The report attributed the sustained reduction in the GNPA ratio since March 2020 primarily to a persistent fall in new NPA accretions and increased write-offs.
The estimate for the GNPA ratio for March 2025 is based on macro stress tests performed to assess the resilience of banks’ balance sheets to unforeseen shocks emanating from the macroeconomic environment.
“The asset quality of scheduled commercial banks recorded sustained improvement, and their GNPA ratio moderated to a 12-year low of 2.8% in March 2024. Their net NPA ratio also improved to a record low of 0.6%,” the report said.
Under the baseline stress scenario, the GNPA ratio of all banks may improve to 2.5% by March 2025. If the macroeconomic environment worsens to a severe stress scenario, the ratio may rise to 3.4%, the half-yearly report noted.
In the severe stress scenario, the GNPA ratios of public sector banks may increase from 3.7% in March 2024 to 4.1% in March 2025, whereas it may go up from 1.8% to 2.8% for private sector banks and from 1.2% to 1.3% for foreign banks.
Stress tests are conducted covering credit risks, interest rate risks, and liquidity risks to assess the resilience of banks in response to these shocks. Using the stress tests, the RBI projects impairment or bad loans and capital ratios over a one-year horizon under a baseline and two adverse scenarios–medium and severe.
The report further states that stress test results reveal that banks are well-capitalized and capable of absorbing macroeconomic shocks even without any further capital infusion by stakeholders.
The half-yearly slippage ratio, which is the new NPA accretions as a share of standard advances, fell across bank groups. Though the amount of write-offs declined during the year, the write-off ratio remained almost at the same level as a year ago due to the reduction in GNPA stock, it added.
