On the Path to Financial Health: Declining NPAs in India's Banking Sector

By: Damini Mehta

The gross NPAs ratio of 3.2% as of September 2023 marks a positive trajectory for the country's banking system.

According to a report in September 2022 by CRISIL, a top ratings agency, Gross Non-Performing Assets (NPAs) of banks were slated to reach a decadal low of 4% by March 31, 2024, riding primarily on the back of the post-pandemic economic recovery and higher credit growth. As we move into the new year, India had already achieved this target a year ahead in March 2023 with a 3.9% gross NPA ratio followed by a decadal low of 3.2% gross NPAs in September 2023.

The Reserve Bank of India's (RBI) recent report on the Trend and Progress of Banking in India, 2023, points to a further improvement in the asset quality of Indian banks. The gross NPAs ratio of 3.2% as of September 2023 marks a positive trajectory for the country's banking system. This improvement, fueled by strategic measures such as recoveries, upgradations, and write-offs, holds implications for the domestic economy, underlining the critical need to address and resolve the NPA problem.

In the fiscal year 2022-23, a substantial 45% reduction in gross NPAs was achieved, with recoveries and upgradations playing a pivotal role in this positive trend. Commercial banks reported gross NPAs of ₹5.7 lakh crore, with public sector banks (PSBs) holding the largest share at ₹4.2 lakh crore. Private banks, foreign banks, and small finance banks also contributed to this decline, recording NPAs of ₹1.2 lakh crore, ₹9,526 crore, and ₹8,608 crore, respectively.

The NPA reduction was particularly pronounced for PSBs, witnessing a drop from ₹1.5 lakh crore to ₹1.02 lakh crore by the end of FY23. Private banks also saw a significant decrease in net NPAs from ₹43,738 crore to ₹29,507 crore, contributing to an overall 33% drop in net NPAs for all commercial banks from ₹2.04 lakh crore in FY22 to ₹1.3 lakh crore in FY23.

The decline in NPAs is not merely a statistical improvement but holds substantial implications for the broader domestic economy. A healthier banking system is better equipped to fuel economic growth through increased lending. As NPAs decrease, the financial institutions regain their strength, providing a conducive environment for attracting investments – a critical driver for economic expansion.

The positive trend in NPAs is especially significant for PSBs, which, as major players in the banking sector, play a crucial role in shaping India's economic landscape. The reduction in net NPAs for PSBs from ₹1.5 lakh crore to ₹1.02 lakh crore signals restored financial health, instilling confidence in investors and stakeholders. A robust banking sector not only supports economic growth but also enhances the country's appeal for foreign direct investment (FDI), contributing to sustainable development.

The RBI's report underscores the effectiveness of various recovery mechanisms, with the Insolvency and Bankruptcy Code (IBC) leading the way. The IBC, contributing 43% to the total amount recovered in 2022-23, has proven to be a dominant mode of recovery. The overall recovery of NPAs via various channels amounted to ₹1.2 lakh crore in FY23, reflecting a proactive approach to resolving bad loans.

While corporate segments are anticipated to witness substantial improvement, challenges persist in sectors such as MSMEs. Mechanisms like the IBC, coupled with the proactive steps taken by the RBI and the government, will continue to be instrumental in supporting recoveries and maintaining credit discipline.

The decline in non-performing assets in the Indian banking system signals a turning tide in the financial landscape. Beyond the statistical improvements, the positive trend carries significant weight in terms of economic revival and investor confidence. As the nation strives for sustained economic growth, addressing and resolving the NPA problem remains pivotal. A robust banking sector is not just a reflection of financial health; it is a cornerstone for attracting investments, fostering economic expansion, and ensuring a prosperous future for India.