NPA woes for the banking sector (GDPI prep)

The issue of Non-Performing Assets (NPAs) in the Indian banking sector has become a cause of concern again with RBI’s observation that the same may increase in next 12 months. RBI’s latest Financial Stability Report (FSR) attributes the same to change in economic environment leading to fresh slippage and declining credit growth. Here is a look at the aggregate NPA level, sectoral and other trends.

By Ashish Agrawal | IIM Calcutta (alumnus) | Founder, India Business Analysis (knowledge portal)


After recording a decline from 10.5% in March’18 to 9.3% in March’19, gross NPA (GNPA)ratio remained at the same level at the end of Sept’19, first six months of this financial year. With aggregate loans & advances of Rs 99 lakh crore, this corresponds to Rs 9.2 lakh crore of NPAs. As mentioned above, this is largely a result of slowing growth and decline in credit which reduces the denominator. While private sector and foreign banks are reasonably well placed on aggregate basis with GNPA of less than 4%, this stands at as high as 12.7%for Public Sector Banks (PSBs). In fact, PSBs account for Rs 7.2 lakh crore of GNPA or close to 80% of entire banking sector NPA. On disaggregate basis, there are still four banks with GNPA ratio of over 20%.

A figure closely related to NPA is PCR or provisions coverage ratio. This is equal to amount kept aside by the banks (not shown as assets in the balance sheet) to be adjusted against write-offs for NPAs. Higher PCR implies lower possibility of unusual write-offs and in turn, greater ability of banks to absorb shocks. For instance, in the worst case, if a bank with PCR of 70% recovers only 20% from its pool of NPAs, it would have to reduce its equity capital by only 10% as 70% of the money would be adjusted from its PCR pool. With PCR of just 40% for PSBsin March’17, the situation was quite alarming. The same has improved to about 62% now aided by recapitalisation of close to Rs 3 lakh crore by the government. The recapitalisation has also helped PSBs improve their CRAR (equity capital to risk weighted assets ratio) to 13.2%, sufficiently better than global benchmark of 8%.

Of the four broad sectors, viz, Industry, Services, Retail and Agriculture, Industry continues to account for maximum NPA with GNPA ratio of 17.3%, although down from over 20% in March’18. On absolute basis, Industry segment account for Rs 4.6 lakh crore of NPA or close to half of total. The only relief is that generation of fresh NPA, which was as high as over 12% during FY18, has declined to 3.8% (annualised basis) by Sept’19.  Other than industry, agriculture sector has witnessed an increase in the ratio which crossed 10% mark whereas for services and retail, it stands at just 6.3% and 1.8%.Apart from concentration in Industry segment, the other distinct characteristic of India’s NPAs is that it is concentrated among large borrowers (within both Industry and services segment). While total loan advanced to this segment is a little over Rs 50 lakh crore, they account for as much as Rs 7 lakh crore of NPA. 

Within Industry, there are 15 sub-sectors with Power and Metals accounting for maximum share of loan at Rs 5.6 lakh crore and Rs 3.5 lakh crore. Unfortunately, both these sectors also account for maximum NPAs at over 20%. Resolution of recent Essar Steel case would be a big relief for the metals sector. Textiles and construction sector are witnessing fresh stress with generation of fresh NPAs going up from just 3% and 6% in March’19 to 6.5% and 7.8% respectively for the two sectors.

An interesting figure disclosed in the FSR is sharp increase in GNPAs of urban co-operative banks from 6.4% to 10.5% between March’19 and Sept’19. However, it is difficult to visualise such a sudden deterioration. A more plausible explanation is doing away with the practice of roll-over and stricter recognition of their NPA by UCBs, a fall-out of the crisis at PMC Bank.

About the Author:

Ashish Agrawal is an alumnus of IIM Calcutta and IIT Roorkee and the Founder of a business analysis portal.

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He has also written a book, Indian Economy & Business. The book is a collection of articles providing simplified, yet comprehensive analysis of key economic, industry, corporate events. It is an attempt to help students of business management gain a perspective on contemporary business issues.