Gross Non-Performing Assets of SCBs down; but projections for 2022 cry for attention

Banking concerns in India

The Gross Non-Performing Assets (GNPA) of Scheduled Commercial Banks (SCB) has dropped to 6.9 per cent by September 2021 end, which was 7.3 per cent as of March 2021. Bad debts set to rise up to 8.1 per cent by September 2022 under the baseline scenario and to 9.5 per cent under a severe stress scenario.

The Gross Non-Performing Assets (GNPA) reported by the Scheduled Commercial Banks (SCB) has dropped to 6.9 per cent at the end of September 2021 from 7.3 per cent at the end of March 2021 as reported by the banks. By the end of March 2020, the GNPA was at 8.2 per cent according to a report released by the Reserve Bank of India (RBI).

The statutory publication, ‘Report on Trend and Progress of Banking Sector in India 2020-21’, presents the performance of the banking sector, including co-operative banks and non-banking financial institutions during 2020-21 and 2021-22 so far.

The banking regulator has been doing its bit to ensure that the banks clean their books, coming hard on them. Its initiatives have yielded visible by now. The liquidity conditions of most of the banks have improved with unprecedented financial heft now available with them.

The report further suggested that the consolidated balance sheet of scheduled commercial banks (SCBs) expanded in size, notwithstanding the pandemic and the resultant contraction in economic activity.

This is commendable, considering that the World has grappled with Covid-19 pandemic for over two years now and is now entering into the third year. In addition, India has also been hit severely. In 2021-22 so far, nascent signs of recovery are visible in credit growth, this report suggested adding that the deposits grew by 10.1 per cent by the end of September 2021 as compared with 11.0 per cent a year ago.

This could also be attributed to the fact that while people have taken the virus into their strides, they are still cautious towards spending and are more inclined towards saving money. The learning comes from widespread losses of wealth (on medical expenditure and because of job losses) and lives during the second Covid-19 wave.

The Capital To Risk Weighted Assets (CRAR) ratio or Capital Adequacy Ratio (CAR) of SCBs has strengthened from 14.8 per cent at the end of March 2020 to 16.3 per cent at the end of March 2021, and further to 16.6 per cent at September 2021 end.

This is not to say that only deposits have played the role. The CAR has also been up aided by higher retained earnings, recapitalisation of public sector banks (PSBs) and capital raising from the market by both PSBs and private sector banks (PVBs).

CRAR is the ratio of a bank’s capital to its risk. The RBI tracks a bank’s CRAR to ensure that it can absorb a reasonable amount of loss and complies with statutory capital requirements.

The consolidated balance sheet of Non-Banking Financial Companies (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 for them.

As for the co-operative banks and district central co-operative banks, improvement was there in 2019-20 even as their asset quality deteriorated. The balance sheet growth of urban co-operatives banks (UCBs) in 2020-21 was also driven by deposits, while subdued credit growth led to acceleration in investments. Their financial indicators, including capital position and profitability, improved, the report said further.

The Central Bank was also instrumental in handling the Yes Bank fiasco and putting it back on its feet in a timely manner. A consortium of banks led by the State Bank of India (SBI) took control and came up with a board professionally.  

The banks have also been able to recover some part of the debts owed to them through insolvency proceedings. Amid the onslaught of the pandemic, insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) were suspended for a year till March 2021. Even the Prime Minister had acknowledged that the government was able to recover over Rs 5 lakh crore of bad debts from the defaulters and much more was in the pipeline, in one of his addresses.

However, the quantum of recovery by the public banks has been under the criticism in many big cases.

The return on assets (RoA) of SCBs has also improved and has gone up to 0.7 per cent at 2021 March-end from 0.2 per cent at 2020 March-end aided by stable income and decline in expenditure.

Challenges in the banking sector loom around, as yet another bank is making news currently. The stepping down of RBL Bank’s Managing Director (MD) and Chief Executive Officer (CEO) has created a lot of anxiety among the depositors in this bank. An interim MD and CEO has now taken over and remains at the helm. The RBI has also appointed its nominee on the board of the bank.

It all started with the PMC Bank. Incidents like these and at such short intervals shake the depositors’ confidence and raise their anxiety.


While the achievement in terms of GNPAs over many quarters is praiseworthy, the test does not end here. According to the RBI’s Financial Stability Report for December 2020, macro stress tests for credit risk indicate that the gross non-performing asset (GNPA) ratio of SCBs could increase from 6.9 per cent in September 2021 to 8.1 per cent by September 2022 under the baseline scenario and to 9.5 per cent under a severe stress scenario.

While, these are projections, the RBI’s task is now cut out in controlling the spiralling of bad debts, yet again. It response to this will decide the course for the sector even as the fear of a third wave of the pandemic looms large.

Emerging signs of stress in micro, small and medium enterprises (MSME), as also in the micro finance segment,call for close monitoring of these portfolios going forward, this report said. This segment has been one of the worst sufferers from the pandemic’s onslaught.

SCBs would, however, have sufficient capital, both at the aggregate and individual levels, even under stress conditions.

Some of the policy measures taken by the RBI in response to the COVID-19 pandemic reached the pre-announced sunset dates in 2021-22 and the top bank has wound down many liquidity measures as a result of this.

Meanwhile, regulatory measures, including deferment of implementation of net stable funding ratio (NSFR), restrictions on dividend payouts by banks, deferment of implementation of the last tranche of capital conservation buffer, have been realigned to avoid extended forbearance and risks to financial stability while providing targeted support to needy sectors.

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