Banks turn profitable as NPAs fall for first time in seven years; here’s what helped

After continued stringent efforts by the banks and the government, the stressed assets in the Indian banking sector declined for the first time in seven years last year. The gross NPA ratio fell from 11.2 per cent in FY18 to 9.1 per cent in FY19. Behind the short success of the banking industry, the RBI has praised recapitalisation of PSU banks for strengthening the capital base, while it said that the Insolvency and Bankruptcy Code (IBC) began to gain traction in enhancing resolutions. “With the concomitant reduction in provisioning requirements, bottom lines improved modestly after prolonged stress and the banking sector returned to profitability after a gap of two years in the first half of 2019-20,” said the latest RBI report on ‘Trend and Progress of Banking in India 2018-19.

Private sector banks have played a larger role in improving the asset quality of SCBs as the revival in the growth of loans and advances that began in 2017-18, maintained momentum into next year as well. Also, as provisioning requirements slackened and credit growth revived modestly, interest income increased. However, while the quantum of provisions declined for PSU banks, it increased for private banks due to a rise in their NPAs.

Behind the deteriorating asset quality of the private banks, the reclassification of IDBI Bank Ltd as a private bank effective 21 January 2019, has been held responsible as after excluding IDBI Bank Ltd, private banks’ GNPA ratio declined.

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Meanwhile, credit growth revival that began in FY18 maintained momentum in the next year as well but notwithstanding these gains, credit growth has turned anaemic in the current year while the overhang of NPAs remains high. The slow macroeconomic growth has also created fear for the growth in the Indian banking industry. Another major roadblock in the Indian banking industry has been increasing incidents of fraud.

The public sector banks accounted for a bulk of frauds reported in the last financial year – 55.4 per cent of the number of cases reported and 90.2 per cent of the amount involved – mainly reflecting the lack of adequate internal processes, people and systems to tackle operational risks, the RBI report added.