GNPA levels likely to fall to 8 per cent by end of this fiscal year

After years of painful effort, the banking industry is likely to see its bad loan levels reduce to nearly 8 per cent by March 2020, according to Crisil.

For representational purposes (Express Illustrations)

HYDERABAD: After years of painful effort, the banking industry is likely to see its bad loan levels reduce to nearly 8 per cent by March 2020, according to Crisil. 

Just two years ago, Gross Non-Performing Assets (NPAs) of banks hit a peak of 11.5 per cent. However, they had declined to 9.3 per cent as of March, 2019. 

“Asset quality of banks should witness a decisive turnaround this fiscal (FY20) with gross NPAs reducing by 350 basis points (bps) over two years to around 8 per cent by March, 2020. This will be driven by a combination of reduction in fresh accretions to NPA as well as stepped-up recoveries from existing NPA accounts,” the ratings firm said in a note. 

Interestingly, much of the reduction in bad loans is likely to come from Public Sector Banks (PSBs), which also account for the highest amount of NPAs in the system at over 80 per cent. As per estimates, PSBs will likely see their gross NPAs climb down over 400 bps to close at 10.6 per cent by March 2020 from a peak of 14.6 per cent in March 2018.

Incidentally, slippages have been on the wane since last fiscal and the rate of accretion of fresh NPAs reduced by half in FY19 to 3.7 per cent as against 7.4 per cent in the previous fiscal. They are expected to further drop to about 3.2 per cent in FY20. 

“This is mainly because banks have already recognised around `17 trillion of stressed loans as NPAs since FY16, led by accelerated NPA recognition following the Reserve Bank of India’s (RBIs) stringent norms and asset quality reviews,” it said, adding that resolution of some large NPA accounts under NCLT-1 and NCLT-2 is expected to fructify by FY20.

This could account for almost half of the total reductions in gross NPAs by March 2020, it said. “Recapitalisation has ensured that a number of PSBs have the balance sheet strength to provide for reasonable haircuts on resolution of stressed asset,” it added. 

Meanwhile, given the RBI stance on loan restructuring to small and medium enterprises (SME) till the end of FY20, the overall NPAs banks should continue improving.

“Though the credit ratio could moderate going forward, steady domestic growth and benign interest rates should continue to support credit profiles in the corporate sector,” it said.