Gross NPAs down, banks must focus on retail loans and write-offs
Six years after the spine-busting twin balance sheets clean-up exercise began, bad loans of Indian banks seem to be nearing a closure. From a low of 2.4% in FY11, gross NPAs surged to a peak of 11.5% by FY18 and are now expected to decline to sub-5% and sub-4% in FY23 and FY24, respectively. While Crisil Ratings pegged gross NPAs at 3.8% in FY24, a joint study by Assocham and Crisil expects them to touch a decadal low of below 4% this fiscal. The steady decline is partly due to effective enforcement and supervision of the banking regulator and strengthened risk management and underwriting measures. The biggest contribution came from corporate loans, whose gross NPAs will likely print below 2% from a peak of 16% in FY18.
Worryingly, bad loans of MSMEs, which got scalped during demonetisation, the GST rollout and the pandemic, are set to rise to 10–11% by March 2024 from about 9.3% as of March 2022. According to Crisil, relief measures helped contain asset quality deterioration last fiscal; MSMEs have undergone aggressive restructuring at about 6% compared with 2% for the overall banking sector. Helpfully, the retail segment’s asset quality remained steady, with gross NPAs expected to be range bound at 1.8–2%. Of the total outstanding loans, retail accounts for about 26%, half of which includes home loans, followed by vehicle loans, unsecured credit cards and personal loans. Signs of stress have just begun, thanks to the twin evils of higher interest rates and inflation, and if it persists, lenders’ and households’ string of worry beads will only get thicker.
While declining gross NPAs is heartening, the other half of the story comprising write-offs and recoveries is not that heartwarming. Total write-offs stood at about Rs 8.8 lakh crore during FY17–FY21, similar to FY21’s gross NPAs at Rs 8.41 lakh crore. Granular data indicates a moderate decline in annual write-offs from Rs 2.2 lakh crore in FY20 to Rs 1.91 lakh crore in FY21. Likewise, the fresh addition of bad loans, too, is reducing and stood at Rs 4.8 lakh crore in FY21. But loan recoveries comprised a paltry Rs 1.59 lakh crore, down from Rs 2.23 lakh crore in FY20 and Rs 2.38 lakh crore in FY19. Banks and the regulator must now direct efforts towards higher recoveries and lower write-offs.