The latest data from CareEdge Ratings reveals a significant decline in Net Non-Performing Assets (NNPAs) of scheduled commercial banks (SCB) based in New Delhi. As of June 30, 2024, NNPAs reduced by 24.9 per cent year-on-year to reach Rs 1 lakh crore. This positive trend is mirrored in the gross non-performing assets (GNPAs), which decreased by 15.2 per cent y-o-y to Rs 4.57 lakh crore in Q1FY25. The GNPA ratio now stands at 2.8 per cent, down from 3.8 per cent in the previous year. This improvement can be attributed to lower slippages, increased recoveries, and steady write-offs over the past year.
The Indian banking sector as a whole has continued on a positive trajectory, with reductions in both GNPAs and NNPAs for SCBs as of June 30, 2024. The NNPA ratio has hit an all-time low of 0.6 per cent, showing a significant improvement from 1.0 per cent in Q1FY24. However, the decline in NNPAs varied among SCBs, with private banks (PVBs) facing a slight increase of 3 basis points in their NNPA ratio due to seasonal collection weaknesses and higher retail delinquencies, resulting in a current NNPA ratio of 0.46 per cent. On the other hand, private sector banks (PSBs) have managed to reduce their incremental provisioning levels due to consistent asset quality improvements, contributing to the overall enhancement of the banking sector’s asset quality.
Looking ahead, the Reserve Bank of India’s (RBI) proposed provisioning norms for projects under construction could impact SCBs’ credit costs in the coming years. Public banks are expected to see a 0.2 per cent increase in credit costs between FY25 and FY27, while private banks could face a 0.1 per cent rise during the same period. Furthermore, potential downside risks to the positive trend in asset quality include elevated crude oil prices, a potential global economic slowdown, and tightening global monetary policies, all of which could influence asset quality and profitability in the near future.
Despite these challenges, the Indian banking sector has managed to reach pre-Asset Quality Review (AQR) levels in terms of asset quality, with SCBs reporting a GNPA ratio of 2.8 per cent and an NNPA ratio of 0.6 per cent. Credit offtake has also seen an 18.1 per cent y-o-y increase in Q1FY25 and is expected to remain strong, supported by economic expansion, capital expenditure increases, and government initiatives like the Production Linked Incentive (PLI) scheme. While the outlook for SCBs is positive, external economic factors and regulatory changes by the RBI may impact the trajectory of asset quality in the upcoming quarters.
