Page 47 - Banking Finance July 2024

ARTICLE

riding on the post-pandemic economic recovery and higher income from interest on lent fund, large number of credit
credit growth. This will be the lowest gross NPA level of defaults affects the profitability and net worth of the banks
Indian banks since 2013 when it stood at 3.40 per cent. As and also erodes the values of the assets. Higher NPAs of the
per the RBI data, the gross NPA of the Indian banks stood commercial banks, both the public sector as well as private
at 5.97 per cent in March 2022. The asset quality of the sector banks gives some indications regarding the state of
Indian banking sector started deteriorating from the early the health of industry and trade and suggests need of policy
part of the last decade. The gross NPA of banks, which stood change in this regard.
at 2.40 per in March 2011, surged to 11.50 per cent in 2018.
The asset quality has improved gradually since 2018. Indian Banks, both PSBs and private banks have a great role
to play in the development of Indian Financial System. These
According the RBI's Financial Stability Report released on banks are the premier source of implementing flagship
June 28, 2023, Gross NPAs stood at 3.9 per cent in FY 2023, programs like Jan Dhan and financial inclusion as well as
down from a high of 11.5 per cent in 2018, a significant drop Digital India. Government cannot take risk to overlook the
in NPAs in the Indian banking sector, down to a 10-year low. various issues, which presently Indian banks are facing,
The period also saw gross advances grow from Rs 83.6 lakh including NPAs. Government has taken view of all aspect
crores in 2018 to Rs 135 lakh crore in 2023. Therefore, the related with problem of NPAs in the Indian Banking system
decrease in the percentage of Gross NPAs in relation to the in particular and in Indian economy in general. It is well
increased base of advances may not tell the full story. known truth that the growth of NPAs has continuously been
Nonetheless, the decline in the Gross NPA percentage is a impeding profitability of Indian banks and is an area of great
turnaround of sorts. concern for both the management of these banks as well
as for government also.
The RBI report highlights this trend, stating: "The Indian
financial system, led by a sound banking system, remains The NPAs of Indian Banking System in India has witnessed
stable and supportive of the productive needs of the both evolution and revolution, driven by regulatory reforms,
economy aided by robust earnings, adequate capital and institutional mechanisms, and economic changes. The
liquidity buffers, and improving asset quality, Indian banks introduction of the IBC, establishment of ARCs, enhanced
are well positioned to sustain the upturn in the credit cycle regulatory frameworks, and bank recapitalization programs
that has been underway since early 2022." This was also the have transformed the NPA resolution landscape. However,
challenges such as the economic slowdown and the impact
time when the economy was recovering from the effect of
of the COVID-19 pandemic require continued efforts to
the pandemic and the government's responses to it. A
strengthen risk management systems and governance
revival in spending allowed banks to expand their retail
lending, where yields are higher and defaults much lower practices. By addressing these challenges and leveraging the
lessons learned, the Indian financial sector can navigate the
than in areas such as lending to infrastructure. The result
of such trends was the turnaround and subsequent surge in path towards a more robust and resilient banking system,
profitability. Financial investors too responded positively to minimizing the impact of NPAs and fostering sustainable
these developments. The total market capitalization of PSBs economic growth. To prevent the recurrence of NPAs, it is
rose from Rs.4.52 lakh crore in March 2018 to Rs.10.63 lakh crucial to strengthen risk management systems and credit
crore in December 2022. appraisal mechanisms.
Banks need to focus on prudent lending practices, effective
Conclusion due diligence, and early identification of potential stressed

We have discussed the few steps that have been taken to assets. Embracing technology and data analytics can
tackle the issue but it seems that these were not adequate enhance the accuracy of credit assessments and risk
and at the same time not in contour with the changes that monitoring. Ensuring sound corporate governance practices,
have been taking place in the banking and Indian vis a vis independence of boards, and transparency in loan
world economy; apart from that lack of systematic approach disbursement processes are essential in curbing the NPA
from all quarters is the main reason for creating mountains problem. Stricter enforcement of regulations and deterrent
of NPAs. NPAs have been eroding profitability of the banks action against willful defaulters can instill discipline and
as Indian Banks have traditionally been dependent on accountability in the financial ecosystem.

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