Write-offs in Covid year helped banks reduce bad loans: RBI

The ratio of gross NPAs to advances indicates the proportion of loans out of the total lending that has not been repaid within the due period. Banks normally write off a non-performing asset when all recovery measures are exhausted and chances of recovery are remote.

In April 2020, when Covid hit the economy, the RBI decided to provide relief to standard bank accounts availing a loan moratorium between March 1 and May 31 that year. The 90-day NPA norm excluded the moratorium period for such accounts. The RBI provided a standstill on asset classification for standard bank accounts, implying these couldn’t be classified as bad assets after the stipulated 90-day period.

With the decline in delinquent assets, the provision requirements also dropped and the net NPA ratio of PSU banks and private banks eased from the previous year. On the contrary, foreign banks reported increasing accretions to NPAs and deteriorating asset quality due to amalgamation of troubled private banks and foreign banks, the RBI said.

In India, most pandemic measures had a well specified sunset clause, and some ran their course during the year. However, the impact of these transient measures on banks’ financial health can be fully fathomed only after passage of time, the central bank said.

A fallout of the pandemic and the slowdown in economic activity is that credit growth of banks remained subdued in 2020-21 but non-banking financial companies (NBFCs) stepped up to fill this space. In the first half of 2021-22, although credit growth of banks showed some uptick, concerns emerged about NBFCs’ asset quality, the RBI said.

Going forward, however, banks would need a higher capital cushion to deal with challenges on account of the ongoing stress experienced by borrowers as well as to meet the economy’s potential credit requirements, the report said.

Based on the capital position as on September 30, 2021, all public sector banks and private banks maintained the capital conservation buffer (CCB) well over the minimum requirement of 2.5 per cent.

During 2020-21, the consolidated balance sheet of banks expanded in size, notwithstanding the pandemic and the resultant contraction in economic activity. “In 2021-22 so far, nascent signs of recovery are visible in credit growth. Deposits grew by 10.1 per cent at end-September 2021 as compared with 11.0 per cent a year ago,” the RBI said.

The central bank said some of the policy measures taken by the RBI in response to the pandemic reached the pre-announced sunset dates in 2021-22.

Certain liquidity measures have been wound down as a result, while other regulatory measures have been realigned to avoid extended forbearance and risks to financial stability while providing targeted support to needy sectors, it said. The measures realigned include deferment of implementation of net stable funding ratio (NSFR), restrictions on dividend payouts by banks and deferment of implementation of the last tranche of capital conservation buffer.

Even though initiation of fresh insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) was suspended for a year till March 2021, it constituted one of the major modes of recovery in terms of amount recovered.

The RBI said the share of large borrowal accounts (exposure of Rs 5 crore or more) in total advances declined to 51 per cent at end-March 2021 from 54.2 per cent a year ago. Their contribution to total NPAs also declined in tandem from 75.4 per cent to 66.2 per cent during the same period.

The special mention accounts-2 (SMA-2) ratio, which signals impending stress, has risen across bank groups since the outbreak of the pandemic, the report said.

The balance sheet growth of urban co-operatives banks in 2020-21 was driven by deposits, while subdued credit growth led to acceleration in investments. Their financial indicators, including capital position and profitability, improved. The profitability of state co-operative banks and district central co-operative banks improved in 2019-20, while their asset quality deteriorated, the report said.

The consolidated balance sheet of NBFCs expanded during 2020-21, driven by credit and investments of non-deposit taking systemically important NBFCs (NBFCs-ND-SI). Their asset quality and capital buffers also improved, the RBI said.