Banks’ NPAs at record lows as recoveries up

Banks’ bad loans have fallen to record lows as recoveries from defaulters rise and many who missed payments have regularised, but lenders are looking at building buffers anticipating some stress, said CareEdge Ratings. Bad loans fell 21% in the last calendar to Rs 4.85 lakh crore, from a year earlier. The ratio of gross bad loans could improve to 2.8% this year from 2.9% last year. Write-offs stood at Rs 34,000 crore from Rs 29,000 crore in the December quarter last year.

“The gross non-performing assets ratio of banks has moved past the pre-asset quality review (AQR) levels in Q3FY24,” said Sanjay Agarwal, senior director at CareEdge Ratings. “This trend is expected to be maintained in FY24 due to several factors, including healthy growth in advances driven by an uptick in economic activities, lower incremental slippages.”

The regulator mandated an AQR a decade ago that led to a surge in bad loans as banks were papering over defaults and classifying many stressed accounts as performing loans. Since then the banks’ accounts reflect a fair position on defaults. While the bad loans are falling, high interest rates and some regulatory actions by the Reserve Bank of India could lead to some defaults and banks are preparing for it. “Initial actions on creating additional provisions which may be necessitated over the next five-six years to meet the requirements of provisioning for expected credit loss,” said Agarwal.