GNPA At Multi-Year Low, But Retail Risks, Frauds Rise: Report

The Provision Coverage Ratio (PCR) stood at a robust 75%, while stress tests indicated the sector's resilience, with CRAR well above the regulatory minimum of 9%. However, rising write-offs, weaker underwriting standards, and heightened risks in microfinance and consumer credit remain concerns

Gross non-performing assets (GNPAs) dropped to a multi-year low of 2.6 per cent, while net non-performing assets (NNPAs) fell to 0.6 per cent, driven by strong provisioning, according to the Reserve Bank of India's Financial Stability Report.

The report also highlighted a decline in SMA-2 accounts, signalling low potential impairment. Retail loan asset quality remained stable, with retail GNPA at 1.2 per cent in September, and SMA (1+2) accounts decreasing from 3 per cent a year ago to 2.5 per cent. However, the retail GNPA ratio for unsecured lending stood slightly higher at 1.7 per cent.

Talking to Bizz Buzz, Rati J Pandit, lead analyst, Nirmal Bang Institutional Equities said, “There are several areas of concern on asset quality front. These areas include the sharp rise in write-offs especially among private sector banks could be partly masking worsening asset quality in the retail loan segment and dilution in underwriting standards.”

Secondly, he further said, 51.9 per cent of retail loan slippages as of the period under review were from unsecured loan segment. Besides, small finance banks (SFBs) are witnessing larger impairment in their retail lending portfolio with the GNPAs at 2.7 per cent, SMA (1+2) at 3.6 per cent and unsecured GNPAs at 4.7 per cent.

The banking system LCR declined from 135.7 per cent to 128.5 per cent in in the period, driven by increase in net cash outflows, which in turn was influenced by a rise in less stable sources of funding.

Jaya Vaidhyanathan, CEO, BCT Digital said, “The RBI report highlights the significant improvement in the banking sector's health, with the GNPA ratio of Scheduled Commercial Banks (SCBs) declining to a multi-year low of 3.6 per cent as of September 2024, compared to 5.0 per cent in March 2023. This reduction underscores enhanced credit discipline, robust monitoring, and effective recovery mechanisms.”

The Provision Coverage Ratio (PCR), a critical measure of risk resilience, stood at an impressive 75 per cent, further strengthening banks' capacity to manage potential credit shocks, she said.

On the fraud management front, regulatory guidelines have focused on enhancing Early Warning Systems (EWS) and leveraging technology for fraud detection. Cybersecurity measures and stronger digital payment controls have been instituted to mitigate risks in an increasingly digital banking ecosystem. The sector's resilience was reaffirmed through stress tests, indicating that even under severe macroeconomic shocks, the Capital to Risk-Weighted Assets Ratio (CRAR) of SCBs remains well above the regulatory minimum of 9 per cent, signalling the robustness of the sector's financial buffers.

As India progresses into 2025, the banking sector is set to sustain its momentum of stability and growth. The GNPA ratio is expected to stabilize below 3.5 per cent, supported by strong asset quality, stringent risk management practices, and favourable macroeconomic conditions. Credit expansion in high-growth sectors and improving consumer sentiment are likely to bolster profitability further.

However, the sector must remain vigilant to risks in microfinance and consumer credit, which make up 15 per cent of SCB loans, with delinquency rates reaching 8.2 per cent in small personal loans and 3.8 to 4.2 per cent in microfinance. Banking fraud surged to Rs 21,367 crore in H1 FY25, with internet and card frauds accounting for 44.7 per cent of the amount and 85.3 per cent of cases. These trends emphasize the urgent need for advanced fraud detection technologies and stronger cybersecurity to address evolving risks.