Ratio of NPAs to Total Loans Improved for September Quarter - Banks' Report

In contrary to the expectations that there would be an increase in bad loans in the banking sector due to Covid-19, the ratio of non-performing assets (NPAs) to total loans has improved during the quarter ended in September 2020. According to a report by Care Ratings, the ratio of gross NPAs of banks has fallen to 7.7 percent from 8.2 percent in June and 7.9 percent in March 2020.

At the end of the second quarter, public sector banks, or PSBs (including IDBI Bank), reported their gross NPA ratio at 9.7 percent compared to 10.2 percent in June 2020. This is the first time in several quarters that PSBs are reporting single-digit gross NPAs. Private sector banks too reported a decline in NPA ratio at 5 percent from 5.5 percent.

“The moratorium provided till August had provided space in terms of recognition of NPAs, which could have improved the ratios. Therefore, we may have to wait for these time periods to elapse to gauge the true levels of NPAs in the system,” said Madan Sabnavis, Chief Economist, Care ratings, in a report.

NPAs are also subdued because of a Supreme Court order that has stayed banks from classifying defaults during the Covid period as an NPA until further orders.

This is the first time in several quarters that PSBs are reporting single-digit gross NPAs

Although banks have followed the order, they have reported the loans that would have turned bad had the order not been there. They have also set aside additional provisions for these loans.

According to the report, the biggest improvement in asset quality has come from UCO Bank, which has seen its ratio of NPAs drop from 14.4 percent to 11.6 percent - a drop of 280 basis points (100bps = 1 percentage point). The Kolkata-based public sector bank reported a net profit of Rs. 30 crore for the second quarter as compared to a loss of Rs. 891 crore in the corresponding period last year. In absolute terms, the bank’s bad loans fell 48 percent year on year to Rs. 16,576 crore. Other banks which reported significant improvement in NPA ratio include Bank of Maharashtra (210 basis points), J&K Bank (180 basis points) and IDBI Bank (170 basis points).

The banks that reported flat asset quality include Kotak Mahindra, State Bank of India and Bandhan Bank which have seen their ratio of NPAs improve by 10 basis points or less. All the major public sector banks that have announced their results have said that most of the legacy non-performing assets have been largely provided for. Also, bankers have said that the expected clamour for a restructuring of bad loans post Covid-19 has not materialized. Most of the banks are expecting only a handful of large loans of over Rs. 1,500 crore to turn up for restructuring.