The six-month loan moratorium and subsequent asset quality suspension rules have masked the pain on banks’ balance sheets, according to the Reserve Bank of India.
The gross bad debt ratios of certain leading banks should have been higher by 19-60 basis points, had they continued to report bad loans normally, the RBI said in its latest issue of ‘Report on Banking Trend and Progress in India. ‘. “Given the uncertainty induced by Covid-19 and its real economic impact, the asset quality of the banking system may deteriorate dramatically in the future.”
In March, the central bank allowed a three-month freeze on payment of term loans, which lasted until August 31. According to data available with the regulator, nearly 40% of all loans were in default in August.
During the moratorium, banks were not allowed to report an account as a non-performing asset if it was standard like March 1. The Supreme Court asked lenders not to classify any new accounts as an NPA after September 1 when the court heard the challenge against the compound interest charged by the banks during the moratorium. Although the government repaid the loan amounts of up to Rs 2 million each, the interim order stands.
That kept the NPAs in check even as lenders began disclosing accounts that were declared ‘standard’ after the Supreme Court order.
Still, RBI said in its report that bad loans have been falling for more than two years. The gross delinquency ratio fell from highs of nearly 15% in March 2018 to about 7.5% in September 2020.
One reason for this steady decline in NPAs is increased provisioning by regular commercial banks. According to the RBI assessment, the net delinquency ratio for scheduled commercial banks fell to 2.8% in March 2020 and to 2.2% in September 2020.
But the decline has been largely led by an increase in write-offs, which have risen steadily since March 2018.
“NPAs older than four years require 100% provisioning and therefore banks may prefer to cancel them. Furthermore, banks voluntarily cancel NPAs in order to clean up their balance sheets, take advantage of tax benefits and optimize the use of capital, “the RBI said in the report.” At the same time, borrowers of canceled loans remain responsible for repayment. ”
.
