Banks’ gross NPA ratio moderates to 12-year low of 2.8% in March 2024: RBI report

“The asset quality of scheduled commercial banks (SCBs) recorded sustained improvement and their GNPA ratio moderated to a 12-year low in March 2024 (to 2.8 per cent). Their net NPA (NNPA) ratio too improved to a record low of 0.6 per cent,” the RBI said in its Financial Stability Report (FSR) for June 2024, released on Thursday.

Under the baseline stress scenario, the GNPA ratio of all banks may improve to 2.5 per cent by March 2025. If the macroeconomic environment worsens to a severe stress scenario, the GNPA ratio may rise to 3.4 per cent, the RBI’s half yearly report said.

In the severe stress scenario, the GNPA ratios of public sector banks (PSBs) may increase from 3.7 per cent in March 2024 to 4.1 per cent in March 2025, whereas it may go up from 1.8 per cent to 2.8 per cent for private sector bank (PVBs) and from 1.2 per cent to 1.3 per cent for foreign banks (FBs).

Stress tests are conducted covering credit risk, interest rate risk and liquidity risk and the resilience of commercial banks in response to these shocks is studied. 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 FSR report said that in the second half of FY2025, public sector banks recorded a substantial reduction (76 basis points) in their gross NPA ratio.

“While the GNPA stock decreased across all bank groups, active and deep provisioning by PSBs and FBs resulted in an improved provisioning coverage ratio (PCR) in March 2024,” the report said.

The half-yearly slippage ratio (new NPA accretions as a share of standard advances) decreased 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 reduction in GNPA stock, it said.

Overall, the sustained reduction in the GNPA ratio since March 2020 has been primarily due to a persistent fall in new NPA accretions and increased write-offs.

The report further said that stress test results revealed that banks are well capitalised and capable of absorbing macroeconomic shocks even in the absence of any further capital infusion by stakeholders.

Under the baseline scenario, the aggregate capital to risk-weighted assets ratio (CRAR) of 46 major banks is projected to slip from 16.7 per cent in March 2024 to 16.1 per cent by March 2025.

It may go down to 14.4 per cent in the medium stress scenario and to 13 per cent under the severe stress scenario by March 2025, which is still above the minimum capital requirement.

“No SCB would breach the minimum capital requirement of 9 per cent over a year ahead horizon,” the FSR report said.

The common equity Tier 1 (CET1) capital ratio of the select 46 banks may decline from 13.8 per cent in March 2024 to 13.4 per cent a year ahead under the baseline scenario.

Even in a severely stressed macroeconomic environment, the aggregate CET1 capital ratio would deplete by 300 bps only, which would not breach the minimum regulatory norms. All banks would be able to meet the minimum regulatory CET1 ratio of 5.5 per cent, the report said.