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Gross NPA declines for the first time in seven years, thanks to Insolvency and Bankruptcy Code, says RBI report

The non-performing assets reported by banks have shown a decline for the first time in last seven years because of the conducive policy environment and reforms like Insolvency and Bankruptcy Code (IBC), RBI said.

The efforts of the Narendra Modi government to clean up country’s banking system from the Non-Performing Assets (NPA) mess seems to be yielding results as the gross non-performing loans of banks improved to 9.1% as of end-September 2019, compared to 11.2% in the fiscal year 2018.

Reportedly, the non-performing assets reported by banks have shown a decline for the first time in last seven years because of the conducive policy environment and reforms like Insolvency and Bankruptcy Code (IBC), the Reserve Bank of India (RBI) said in its report.

“The gross NPA ratio of all banks declined in FY19 after rising for seven consecutive years, as recognition of bad loans neared completion,” the RBI said in its report on Trend and Progress of Banking 2018-19. The report noted that the gross NPAs has declined to 9.1% in March 2019 from 11.2% in March 2018 as recognition of bad loans neared completion.

“Decline in the slippage ratio, as well as a reduction in outstanding GNPAs, helped in improving the GNPA ratio. While a part of the write-offs was due to ageing of loans, recovery efforts received a boost from the IBC. The restructured standard advances to gross advances ratio began declining after the asset quality review (AQR) in 2015 and reached 0.55% at end-March 2019,” the report said.

Read: Why Modi government deserves huge applause for the Insolvency and Bankruptcy code

Further, the report stated that there was a decline in both gross NPA and in the net NPA ratios. However, the deteriorating asset quality of private banks in terms of the GNPA ratio was due to the reclassification of IDBI Bank as a private bank effective January 21, 2019. The GNPA ratio of these banks showed a decline if IDBI Bank is excluded as a private bank, the report stated.

The recovery of stressed assets improved during 2018-19 mainly because of resolutions under the IBC, which contributed more than half of the total amount recovered. However, recovery rates yielded by major resolution mechanisms declined in 2018-19, especially through the SARFAESI mechanism.

“Cases referred for recovery under various mechanisms grew over 27% in volume and tripled in value during the year, leading to a pile-up of bankruptcy proceedings. This highlights the need to strengthen and expand the supportive infrastructure,” the report said.

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