The gross non-performing asset ratio of domestic banks is likely to remain stable at 4.9% by September 2023, compared to 5% in September this year.
If all macroeconomic indicators remain stable, gross bad loans are unlikely to rise or fall much from current levels, according to projections presented in the Reserve Bank of India's latest edition of the Financial Stability Report.
In a severe stress scenario, the gross NPA could rise to 7.8% by Sept. 30, 2023, the report noted. A severe stress scenario refers to high double-digit inflation figures and negative gross domestic product growth numbers by the second half of the next fiscal.
The gross NPA ratio in September was down from 5.7% in the previous quarter. This is a seven-year low for gross NPA for banks. The reduction in slippages or fresh accretions to NPAs was a major contributor to the reduction in overall bad loans.
Under the assumption of no further regulatory reliefs as well as without taking the potential impact of stressed asset purchases by National Asset Reconstruction Company Limited into account, stress tests indicate that the gross NPA ratio of all scheduled commercial banks may improve from 5% in September 2022 to 4.9% by September 2023, under the baseline scenario, the RBI said in its financial stability report.
Among lenders, public-sector banks had a gross NPA ratio of 6.5% at the end of the second quarter. This is expected to remain flat by September 2023 at 6.4% in the baseline scenario. However, bad loan ratios for state-owned lenders may worsen to 9.4%, or rise by 290 basis points, in the severe stress scenario.
In the baseline stress scenario for private banks, the gross NPA ratio is expected to fall marginally from 3.3% as of September 2022 to 3.1% next year. The gross NPA ratio is expected to rise by 250 basis points in a severe stress situation as well.
Since March 2021, the provisioning coverage ratio has been steadily going up, reaching 71.5% in September 2022. The PCRs of private and foreign banks exceeded 75%. Meanwhile, the write-offs to the gross NPA ratio increased for all banks during the first six months of this fiscal on an annualised basis after declining for two consecutive years.
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