Moratorium, loan recoveries help Indian banks improve GNPA ratio, but will it sustain?

India’s banking sector saw its gross non-performing assets (GNPA) come down in the second quarter of this fiscal year. The GNPA ratio of SCBs improved to 7.7% in the quarter ended September against 9.3% in the year-ago period, CARE Ratings said in a report. Although the asset quality of the banks seems to be better, the improvement has come owing to the moratorium offered by the Reserve Bank of India (RBI), recoveries and higher write-offs made by multiple banks. “As per disclosures by banks, the Gross NPAs would have been around 0.5% to 0.6% higher had these (moratorium) accounts been classified as NPAs,” the report said.

Asset quality improves

Among state-owned banks, India’s largest lender State Bank of India (SBI) reported the highest asset quality improvement, with a decline in GNPA ratio to 5.3% in the second quarter of this fiscal year against 7.2% a year ago. SBI accounts for nearly 20% of public sector bank GNPAs. Punjab National Bank (PNB) reported GNPAs at 13.4% against 16.8% a year ago. “Net NPAs also shrank to Rs 2.1 lakh crores in Q2FY21 from Rs 4.5 lakh crores in Q2FY19 reflecting an increase in provision coverage ratio (PCR),” CARE Ratings said. 

Recoveries were better in the fiscal second quarter, helping in improving the asset quality of banks. SBI’s recoveries stood at Rs 4,038 crore, ICICI Bank was at Rs 1,945 crore, followed by Bank of Baroda with Rs 1,642 crore worth of recoveries. “On an overall basis PSBs accounting for 75% share of GNPAs of SCBs have experienced a drop in the GNPA ratio to 9.3% in the quarter ended September against 11.6% in the year-ago period,” the report highlighted. 

Skeletons to be unearthed ahead?

CARE Ratings said that now that the moratorium offered by the banks has been lifted, the after-effect and the impact on the banks’ balance sheets may be witnessed in the latter part of the year and subsequent period. Banks have been ordered to not declare covid-19 related defaults as NPAs until further notice, hence keeping the GNPA ratio lower. However, following this many banks have kept aside extra provisioning for NPAs that may arise in future, making higher provisions in September. 

The report said that in the coming quarters provisions of SCBs are likely to remain elevated on account of the recognition of stressed assets owing to Covid-19 and its disruptions affecting the businesses which could impact the financial performance.