The Hindu : Business : Sharp decline in banks' bad loans

Online edition of India's National Newspaper
Tuesday, Nov 30, 2004

Business

Business

Sharp decline in banks' bad loans — RBI report

By Our Special Correspondent

MUMBAI, NOV. 29. Reflecting the success of financial sector reforms, banks have made substantial progress in cleaning up their non-performing assets (NPAs) from their balance sheet, the Reserve Bank of India stated today. The level of NPAs is recognised as a critical indicator for assessing banks' credit risk, asset quality and efficiency in allocation of resources to productive sectors.

"In 2003-04, there was a remarkable improvement in the asset quality of scheduled commercial banks. Despite the switchover to 90-day delinquency norm with effect from March 2004, the gross NPAs of commercial banks declined in absolute terms for a second year in succession,'' the RBI stated in its `Report on Trend and Progress of Banking in India 2003-04,' which released today. While the gross NPAs declined by 5.6 per cent in 2003-04 as against a decline of 3 per cent in 2002-03, the net NPAs declined substantially by 24.7 per cent during 2003-04 as against a decline of 8 per cent in 2002-03, `due to significant provisioning.'

The decline in NPAs is evident across bank groups. The ratio of net NPAs to net advances of commercial banks declined from 4.4 per cent in 2002-03 to 2.9 per cent in 2003-04. All bank groups witnessed a decline in the ratio of net NPAs to net advances in 2003-04. However, the old private banks had the highest net NPAs ratio at 3.8 per cent followed by public sector banks, new private banks and foreign banks.

In 2003-04, the share of NPAs in the priority sector to total NPAs of public sector banks increased marginally. However, there was a decline in the share of NPAs of the agriculture sector and small-scale industries but an increase in the share of other priority sectors. While the share of NPAs on account of public sector undertakings declined, the share of NPAs of non-priority sectors increased in 2003-04. In the case of private sector banks, the share of NPAs on account of the agriculture sector was lower when compared with 2002-03.

On interest rates

The RBI also stated that there does not appear to be any further scope of a fall in interest rates in the current financial year.

"While a declining interest rate scenario has positive spin offs for the banking sector, given that interest rates had touched historically low levels by 2003-04, there does not appear to be any further scope for similar trends to be observed during 2004-05,'' the RBI stated.

Over the past few years there has been a steady decline in interest rates largely reflecting sustained reduction in inflation rates and inflationary expectations. Such reductions in interest rates occurred in an environment where credit growth remained sluggish. Consequently, there was a favourable impact on banks' balance sheets in terms of increased operating profits from treasury operations.

However, "in future, an increasing proportion of bank's income would emanate from the traditional business of lending,'' the RBI stated. Banks now have a diversified credit portfolio with increasing shares of lending to housing, consumer credit, and credit to other priority sectors such as small transport operators. It added that the flow of credit to agriculture also continues to remain robust given the enabling policy environment, which has emphasised credit delivery.

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