On the back of post-pandemic economic recovery and higher lending growth, Indian banks’ gross non-performing assets (GNPAs) are expected to improve by 90 basis points (bps) year-on-year to 5% this fiscal year and a further 100 bps per decade from a 4% low to as of March 31, 2024, says the rating agency CRISIL in its latest report.

NPAs, a key indicator of banking sector asset quality, are set to decline in the coming months following their proposed sale to National Asset Reconstruction Company Ltd (NARCL). NARCL is an Asset Reconstruction Company (ARC) formed by banks to aggregate and consolidate stressed assets for their subsequent resolution.

However, not all segments will do equally well, says CRISIL, adding that the biggest improvement will be seen in the corporate segment, where gross NPAs will fall below 2% in the next fiscal year from a peak of 16% on March 31 2018

Krishnan Sitaraman, senior director and deputy chief rating officer at CRISIL Ratings, says the steady improvement in the quality of corporate assets is clearly reflected in leading indicators such as the credit quality of bank exposures.

Reserve Bank of India data, GNPAs of commercial banks have increased to Rs 8,00,463 crore (GNPA ratio of 6, 93%) on September 30, 2021. The GNPAs of NBFCs with and without deposits amounted to Rs 1,91,413 crore (GNPA ratio of 6.87%).

A CRISIL study of large bank loans, which account for more than half of corporate loans, shows that the proportion of “high security” loans has risen from 59% in March 2017 to 77% in March 2022 and are sub-investment grade -Companies more than halved to 7% vs. 17%.

The reduction in the risk of non-performing loans and the improvement in asset quality in the corporate segment comes after a major clean-up of the banking books in recent years. This has strengthened risk management and underwriting. It also led to an increased preference for borrowers with better credit profiles.