RBI projects further moderation in bank NPA to 2.5%

Gross bad loan ratio hit a 12-year-low of 2.8% last fiscal year; however, it could rise to 3.4% under a severe stress scenario, RBI said in its semi-annual Financial Stability report. State-owned banks continued to have the highest bad loan ratio—toxic assets as a percentage of gross loans—among peer banks, although lower than where they were even a year ago.

While the gross non-performing asset (NPA) ratio of public sector banks was at 3.7% as on 31 March, private sector banks and foreign banks were at 1.8% and 1.2%, respectively. The report pointed out that the continuous decline in bad loans since March 2020 has been on the back of a lower addition of fresh NPAs and increased write-offs.

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“This issue of the FSR highlights the strengthening of balance sheets of financial institutions with low levels of impairments, robust earnings and strong buffers that render the financial system resilient to shocks," RBI governor Shaktikanta Das said in the foreword.

As per the report, a metric known as the banking stability indicator (BSI) provides a comprehensive assessment of the health of the domestic banking system. The BSI, it said, shows that overall stability of the banking system improved on the back of stronger capital levels, higher earnings, and a decline in the stock of NPAs, including restructured loans.

Efficiency indicators weaken

While profitability indicators like return on assets, return on equity and net interst margin remained strong in March, it was marginally lower than September 2023. However, efficiency indicators weakened because of the increase in staff costs and the cost-to-income ratio.

“Today, the matrix of financial stability is perhaps at its best, but the real challenge is to maintain it and improve upon it further," said Das. “The regulators, on their part, remain committed to these goals. We are focused on having in place an ecosystem that is adaptive and proactive in safeguarding the stability of the financial system."

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On retail loans, the report listed some concerns that it said require close monitoring. In November, RBI raised the risk weights assigned to unsecured consumer credit like personal loans and credit card dues. “Overall asset quality of outstanding credit showed an improvement, except personal loans," the report said.

It said that delinquency levels among borrowers with personal loans below ₹ 50,000 remain high. Second, vintage delinquency—a measure of slippage—remains relatively high in personal loans at 8.2%. Vintage delinquency is the percentage of loan accounts that have ever turned delinquent within a year of onboarding. It is a key metric to assess the efficiency of the loan underwriting process. Third, little more than a half of the borrowers in this segment have three live loans when they were onboarded, and more than one-third of the borrowers have availed of more than three loans in the last six months.

Das extols Indian economy

In the foreword, Das once again extolled the Indian economy. He said that amid global headwinds, the domestic economy is exhibiting strength and resilience, with strong macroeconomic fundamentals and buffers.

“Economic activity is expanding at a steady pace, with the financial system being stronger and more vibrant than what it was before the onset of the recent period of crises," said Das.

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While saying how the financial sector has remained strong, Das said the central bank is watchful of emerging risks, including those from cyber hazards, climate change and global spillovers.

“The regulators, including the Reserve Bank, remain committed to promote innovation, financial inclusion, efficient payment and settlement systems, and a robust financial system. New technologies offer gains in efficiency and customer experience, but they can also bring with them sudden and widespread disruptions to the financial system," said Das.