Mumbai: The Reserve Bank of India, which has been relentlessly pushing banks to recognise bad loans, believes that they may be over the worst with the industry likely reporting a decline in non-performing assets (NPAs) in the current fiscal year for the first time since 2015, when the regulator began tightening norms.The central bank forecast gross bad loans will decline to 10.3% of total loans by March 2019 from 10.8% at the end of September 2018 and 11.5% in March 2018. The net NPA ratio also registered a decline during the period.“In a sign of possible recovery from the impaired asset load, the GNPA (gross non-performing assets) ratio of both public and private sector banks showed a half-yearly decline, for the first time since since March 2015, the financial year-end prior to the launch of asset quality review,” RBI said in its 18th Financial Stability Report, the first since Shaktikanta Das became governor in December following Urjit Patel’s departure. “The banking stability indicator (BSI) shows that asset quality of the banks has improved, although profitability continues to erode.”The Indian banking industry was plunged into gloom after RBI’s asset quality review in 2015 forced lenders to reclassify many standard loans as bad assets. These had been shown to be standard by either evergreening or restructuring on terms that were impossible to achieve. Many corporate borrowers with revamped loans continued to struggle and default on payments.The turnaround will be good news for the government, which has been looking to shore up credit growth to spur economic activity and generate jobs. Financial services secretary Rajiv Kumar had told ET last week that bad loans of state-run banks were declining and that they had recognised most of their stressed assets.While the overall situation is improving, the jump in bad loans under a stress test scenario will leave many banks vulnerable and push them below minimum capital requirements, said the report. “Sensitivity analysis indicates that 18 SCBs (scheduled commercial banks), including all public sector banks (PSBs) under Prompt Corrective Action (PCA) may fail to maintain the required CRAR (capital to risk weighted assets ratio) under a two standard deviation shock to the GNPA ratio, unless capital infusion takes place and banks improve their performance,” said the report.
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Although the industry shows signs of stabilising, the gulf has widened between banks under PCA due to their weak finances and those with sufficient capital.“There has been a further widening between PCA and non-PCA PSBs,” it said. “While the non-PCA PSBs’ credit growth improved from 9.1% in March 2018 to 13.6% in September 2018 and deposits increased from 6.1% to 7.9% in the same period, the PCA-PSBs registered negative growth in both credit and deposits.”Patel quit as RBI governor following differences with the government over issues such as the restrictions on weak banks under the PCA regime, easing liquidity for non-banking finance companies and the level of reserves the regulator needed to hold.