Banks’ net bad loans drop to 15-year low of 1%

Banks have ended FY23 with their balance sheets cleanest in 15 years. According to a report by India Ratings (Ind-Ra), an affiliate of Fitch, banks’ net non-performing assets (NPAs) have dropped to 1% while gross NPAs are at 4%.

The last time net NPAs were at the 1% level was in 2008. The improvement in the NPA ratio in 2007-08 was also a function of the high base as that year saw bank credit grow 24% on the back of a 27% increase in 2006-07. The current improvement in asset quality comes after a massive clean-up by RBI in 2016 through an asset quality review which was followed by years of provisioning and insolvency proceedings.

The improvement comes despite the Covid-19 shock to businesses as banks and the regulator had learnt from experience. Ind-Ra’s report reveals that gross non-performing advances (GNPAs) stand at 4.0% at a system level, while net non-performing advances (NNPAs) are at 1.0%. Public sector banks (PSBs) witnessed a significant decline in GNPA, dropping from a peak of 14.1% in FY18 to 5.0% in FY23. Private sector banks also showed improvement, with their GNPA reducing to 2.3% from 6.3%.