Asset Quality of Banks Remained Strong in FY25
The asset quality of Indian banks has shown significant improvement during the fiscal year 2023-2024 (FY25), driven by low net additions to non-performing assets (NPAs), a new report said on Friday. This trend has helped banks strengthen their balance sheets, while credit costs have continued to decline, boosting overall profitability, according to data compiled by CareEdge Ratings.
The report highlights that the Indian banking system has made significant progress in improving its asset quality, which is a crucial factor in determining the overall health of the financial sector. The data shows that the gross non-performing assets (GNPAs) of banks decreased by 12.2% year-on-year (YoY) to 6.4% of net advances as of March 31, 2024. This decline is a significant improvement from the 7.3% recorded as of March 31, 2023.
The improvement in asset quality has been driven by a combination of factors, including the banks’ efforts to aggressively clean up their balance sheets, the decline in fresh slippages, and the positive impact of the Reserve Bank of India’s (RBI) measures to support the economy. The RBI’s measures, such as the reduction in the repo rate and the introduction of targeted long-term reproductive (TLTRO) schemes, have helped to improve the credit environment and reduce the risk of default for borrowers.
The report also highlights that the net additions to NPAs have been low, which is a positive sign for the banking sector. The net additions to NPAs decreased by 54.1% YoY to Rs 1.4 lakh crore (approximately USD 17.3 billion) as of March 31, 2024. This decline is a significant improvement from the Rs 3.1 lakh crore (approximately USD 38.5 billion) recorded as of March 31, 2023.
The improvement in asset quality has also helped banks to strengthen their balance sheets, which is a critical factor in determining their ability to lend and support the economy. The banks’ capital adequacy ratio (CAR) has improved significantly, with the average CAR increasing by 120 basis points (bps) YoY to 14.2% as of March 31, 2024. This is a significant improvement from the 13.0% recorded as of March 31, 2023.
The decline in credit costs has also been a significant factor in the improvement in asset quality. The credit costs of banks decreased by 34.6% YoY to 1.3% of net advances as of March 31, 2024. This decline is a significant improvement from the 2.0% recorded as of March 31, 2023.
The improvement in asset quality and the decline in credit costs have also boosted the overall profitability of banks. The net interest margins (NIMs) of banks increased by 23 basis points (bps) YoY to 3.5% as of March 31, 2024. This is a significant improvement from the 3.2% recorded as of March 31, 2023.
The report also highlights that the Indian banking sector has shown significant improvement in terms of its ability to lend to the economy. The growth in advances has increased significantly, with the advances of banks growing by 13.1% YoY to Rs 113.3 lakh crore (approximately USD 1.4 trillion) as of March 31, 2024. This is a significant improvement from the 8.1% growth recorded as of March 31, 2023.
In conclusion, the asset quality of Indian banks has shown significant improvement during FY25, driven by low net additions to NPAs, a decline in credit costs, and an improvement in balance sheet strength. These factors have boosted the overall profitability of banks, while also enabling them to lend more to the economy. The improvement in asset quality is a significant positive sign for the Indian banking sector, and it is likely to continue to support the country’s economic growth in the future.
Source:
https://investmentguruindia.com/newsdetail/asset-quality-of-banks-remained-strong-in-fy25182970
