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Bad loans of banks likely to further decline to 5.3% of total advances by March 2023: RBI

However, it cautioned that the proportion of bad loans may increase if the macroeconomic environment worsens

Reserve Bank of India (RBI) in its Financial Stability Report (FSR) report has said that the bad loans of banks are expected to further decline to 5.3 per cent of total advances by March 2023 from a six-year low on the back of growth in credit and declining trend in the stock of NPAs. However, it cautioned that the proportion of bad loans may increase if the macroeconomic environment worsens.

According to the report, the gross non-performing asset (GNPA) ratio of banks fell to a six-year low of 5.9 per cent in March 2022. It said the GNPA ratio of scheduled commercial banks (SCBs) stood at 7.4 per cent in March 2021. It also said support measures provided by the regulator during the COVID-19 pandemic aided in arresting GNPA ratios of SCBs even with the winding down of regulatory reliefs. It noted that under the assumption of no further regulatory reliefs as well as without taking the potential impact of stressed asset purchases by NARCL into account, stress tests indicate that GNPA ratio of all SCBs may improve from 5.9 per cent in March 2022 to 5.3 per cent by March 2023 under the baseline scenario driven by higher expected bank credit growth and declining trend in the stock of GNPAs, among other factors.

The RBI further said if the macroeconomic environment worsens to a medium or severe stress scenario, the GNPA ratio may rise to 6.2 per cent and 8.3 per cent, respectively. At the bank group level too, the GNPA ratios may shrink by March 2023 in the baseline scenario. In the severe stress scenario, however, the GNPA ratios of public sector banks (PSBs) may increase from 7.6 per cent in March 2022 to 10.5 per cent a year later. The GNPA ratios would go up from 3.7 per cent to 5.7 per cent for private sector banks and 2.8 per cent to 4 per cent for foreign banks over the same period.