COVID clouds loom large, but banks see a silver lining in India

Gross NPA declines to 7.5 pc; CRAR improves to a healthy15.8 pc 

MUMBAI/December 29-202: The scheduled commercial banks (SCBs) in the county (India) have displayed resilience during the first half of the financial year with their gross non-performing assets (GNPAs) having gradually declined and with the capital to risk weighted assets ratio (CRAR) showing signs of improvement.

A Reserve Bank of India (RBI) report released on Tuesday stated that the SCBs’ gross non-performing assets (GNPA) ratio declined from 9.1 per cent at end-March 2019, to 8.2 per cent at end-March 2020, and further to 7.5 per cent at end-September 2020.

Capital to risk weighted assets ratio (CRAR) of these banks has strengthened from 14.3 per cent at end-March 2019 to 14.7 per cent at end-March 2020, and further to 15.8 per cent as of September end, 2020.

The NPA picture may not be as rosy as it looks. The data on gross non-performing assets (GNPA) of the banks are yet to reflect the stress, obscured under the asset quality standstill with attendant financial stability implications.

“An analysis of the published quarterly results of a sample of banks indicates that their GNPA ratios would have been higher in the range of 0.10 per cent to 0.66 per cent at end-September 2020,” the report notes.

But the silver lining is that the COVID-19 provisioning and ploughing back of dividends, as directed by RBI, would help shield their balance sheets from emanating stress to a certain extent.

This Report presents the performance of the banking sector, including co-operative banks, and non-banking financial institutions during 2019-20 and 2020-21 so far.

The broad theme of this year’s report is the impact of COVID-19 on banking and non-banking sectors, and the way forward. During 2019-20 and first half of 2020-21, scheduled commercial banks (SCBs) consolidated the gains achieved after the turnaround in 2018-19.

The improvement in CRAR may have been partly aided by the recapitalisation of public sector banks (PSBs) and capital raising from the market by both public and private sector banks.

Net profit

On the net profit front, there has been a turnaround in 2019-20 after having suffering losses in the previous two years. During the first half of the current year ending September 30, 2020, their financial performance was shored up by the moratorium, standstill in asset classification and ploughing back of dividends.

The Reserve Bank undertook an array of policy measures to mitigate the effects of COVID-19; its regulatory ambit was reinforced by legislative amendments, giving it greater powers over co-operative banks, non-banking financial companies (NBFCs), and housing finance companies (HFCs), and it also undertook a series of initiatives to bolster its supervisory framework.

The recovery process gained traction with the resolution of large accounts through the Insolvency and Bankruptcy Code (IBC); the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI) channel also aided the process of recovery.

UCBs growth muted

The balance sheet growth of Urban Co-operative Banks (UCBs) moderated in 2019-20 on lower deposit accretion and muted expansion in credit. While their asset quality deteriorated, increased provisioning resulted in net losses.

However, the performance of state co-operative banks improved, both in terms of profitability and asset quality.

The consolidated balance sheet of NBFCs decelerated in 2019-20 due to near stagnant growth in loans and advances although some improvement became visible in the first half of the current year (H1:2020-21).

Notwithstanding a marginal deterioration in asset quality, the NBFC sector remains resilient with strong capital buffers.


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