Context: As a result of protracted lockdown that has severely disrupted business operations and left millions of people jobless, compressing their ability to repay loans, Indian banks' bad loan ratio may hit the highest level in more than 20 years.

Findings of the RBI’s Financial Stability Report:

  • Non-performing assets may rise 4 percentage points to 12.5% of total advances by March 2021 - the highest since the year ended 31 March 2000. 
    • Among commercial banks, the gross bad loan ratio of state-run banks could increase to 15.2%.
    • And the bad loan ratio of private banks and foreign banks may increase to 7.3% and 3.9%, respectively.
    • The central bank warned that if the economic conditions worsen further, the ratio may soar to 14.7%.
  • The end of a moratorium on loan repayments, aimed at providing relief to businesses and individual borrowers, may see many loan accounts turn non-performing.
  • Banks are preparing for a further worsening of asset quality by raising funds to bolster their capital buffers. 

Source: Mint

Possible impacts:

  • Will put further pressure on lenders who are struggling with subdued credit demand amid the coronavirus pandemic and a mountain of bad loans. 
  • May further reduce the ability of banks, especially the weak ones, to extend credit, and the government may have to infuse more funds into state-run banks to build stronger buffers that can absorb loan losses.
  • Raise funds from the markets: The government has not budgeted any capital infusion into these banks for FY20 in the face of the pandemic, this has pushed public sector banks to raise funds from the markets. 
  • Private banks less affected: The private banks, with lower bad loans have been more successful in raising funds.


Non-Performing Assets

Stressed Assets

It is a broader term and comprises NPAs, restructured loans and written off assets.

  • Restructured Loans: Assets/loans which have been restructured by giving a longer duration for repayment, lowering interest or by converting them to equity.
  • Written off Assets: Assets/loans which aren’t counted as dues, but recovery efforts are continued at branch level – done by banks to clean up their balance books.

Non-performing asset (NPA)

  • It is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days or more
  • In case of Agriculture/Farm Loans, the NPA varies for short duration crops (interest not paid for 2 crop seasons) and long duration crops (interest not paid for 1 Crop season).
  • Banks are required to classify NPAs further into - Substandard, Doubtful & Loss assets.
    • Substandard assets: Assets which have remained NPA for a period less than or equal to 12 months.
    • Doubtful assets: Assets which have remained in the substandard category for a period of 12 months.
    • Loss assets: It is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.


RBI’s Financial Stability Report

  • The RBI has been publishing (biannually) India Financial Stability Report since 2010. 
  • The objective of FSR is to assess the financial stability scenario in the country, which is now one of the three important objectives of monetary policy besides price stability and credit support.
  • The Report also discusses issues relating to development and regulation of the financial sector and reflects the collective assessment on risks to financial stability and the resilience of the financial system of India.
Image Source: Mint