RBI reveals gross NPA of banks hit 12-year low of 2.8%, credit growth to improve; 5 key highlights of June report

The Reserve Bank of India (RBI) released the June Financial Stability Report on Thursday, June 27, highlighting that the Indian economy and the financial system remain resilient as the gross non-performing assets (GNPA) ratio of banks has declined to a multi-year low. Indian financial institutions and banks have reported improved balance sheets, which will help macroeconomic activity through a sustained credit expansion, according to the central bank.

Despite geopolitical headwinds, the global financial system has managed to remain resilient, maintaining stable fiscal conditions, according to the RBI report. Meanwhile, RBI Governor Shaktikanta Das has asked all stakeholders in the Indian financial system to assign "highest priority" to governance after the recent stress test results and probes conducted by the regulating authorities.

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RBI June Financial Stability Report: Here are the top 5 key highlights

1.Gross NPA of banks at multi-year low

The gross non-performing assets (GNPA) ratio fell to a 12-year low of 2.8 per cent at the end-March 2024, the RBI said in its June report. The scheduled Commercial Banks' or SCBs' net non-performing assets (NNPA) ratio fell to 0.6 per cent at end-March 2024. “The asset quality of SCBs recorded sustained improvement, and their GNPA ratio moderated to a 12-year low in March 2024. Their NNPA ratio too improved to a record low,” said the central bank.

The half-yearly slippage ratio (viz, new NPA accretions as a share of standard advances) decreased across bank groups. Though the amount of write-offs declined during the year, the write-off ratio remained almost at the same level a year ago due to a reduction in GNPA stock, according to the RBI.

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2.CRAR of SCBs and NBFCs

The capital to risk-weighted assets ratio (CRAR) and the common equity tier 1 (CET1) ratio of SCBs stood at 16.8 per cent and 13.9 per cent, respectively, at end-March 2024, said the report. The macro stress tests for credit risk reveal that SCBs would comply with minimum capital requirements, with the system-level CRAR in March 2025 projected at 16.1 per cent, 14.4 per cent and 13.0 per cent, respectively, under baseline, medium and severe stress scenarios.

These scenarios are stringent conservative assessments under hypothetical shocks and the results should not be interpreted as forecasts, according to RBI. For the non-banking financial companies (NBFCs), the CRAR stands at 26.6 per cent, GNPA ratio at 4.0 per cent and return on assets (RoA) at 3.3 per cent, respectively, at end-March 2024.

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3.RBI Governor stresses on high priority to governance

RBI Governor Shaktikanta Das asked all stakeholders in the financial system to assign "highest priority" to governance. In his foreword to the central bank's half-yearly report, Das said the Indian economy is exhibiting strength and resilience, with strong macroeconomic fundamentals and buffers amid global headwinds.

RBI said that the macro stress tests for credit risk are used to assess how well banks can handle potential financial shocks. The stress tests show that even under severe stress scenarios, banks' and non-banks' buffers will remain above minimum regulatory capital levels, according to the RBI Governor. 

The RBI is watchful of emerging risks from cyber hazards, climate change and global spillover, according to Shaktikanta Das. "The highest priority must be assigned to governance as strong governance is at the core of resilience of stakeholders in the financial system,'' added Das.

4.NPA of SCBs may fall further to 2.5%

The bad assets or gross NPAs of commercial banks may go down further to 2.5 per cent by the end of the current fiscal, said the RBI in its report. The RBI said macro stress tests are performed to assess the resilience of SCBs’ balance sheets to unforeseen shocks emanating from the macroeconomic environment.

The stress tests attempt to assess capital ratios over a one-year horizon under a baseline and two adverse (medium and severe) scenarios. "The GNPA ratio of all SCBs may improve to 2.5 per cent by March 2025 under the baseline scenario," said RBI.

However, if the macroeconomic environment worsens to a severe stress scenario, the ratio may rise to 3.4 per cent. Under the severe stress scenario, the GNPA ratios of PSBs may increase from 3.7 per cent in March 2024 to 4.1 per cent in March 2025, whereas it may go up from 1.8 per cent to 2.8 per cent for private sector banks and from 1.2 per cent to 1.3 per cent for foreign banks.

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5.Healthy balance sheets to support credit growth

The global economy is currently facing significant risks stemming from ongoing geopolitical tensions, high levels of public debt, and slow progress in reducing inflation. Despite these, the global financial systems is resilient. According to RBI, the near-term global macro financial risks have receded, helped by lower inflation and economic recovery.

The Indian economy's robust macroeconomic fundamentals and a resilient financial system support economic stability. The RBI pointed out that with healthier balance sheets, banks and financial institutions in India are actively supporting economic activities through consistent credit expansion. 

“Today, the matrix of financial stability is perhaps at its best, but the real challenge is to maintain it and improve upon it further. In the "stable environment", the RBI is watchful of emerging risks from cyber hazards, climate change and global spillovers,'' said the RBI Governor.