CRISIL: Gross NPA of Banks to Rise in FY-22

According to a recent report by CRISIL, the gross NPAs of banks will rise in the financial year 2022. It is expected to swell up to 9.8%, which is enormous considering the ratio of NPAs in the last financial year in March 2021 was 7.48%. However, it is still likely to remain lower than the NPAs ratio in FY18, which went as high as 11.2%.

The report claimed that “Macro stress tests indicate that the gross nonperforming asset (GNPA) ratio of banks may increase from 7.48 per cent in March 2021 to 9.80 per cent by March 2022 under the baseline scenario”.

Moreover the stressed asset of the banking sector may rise to ~11% since assets would be reorganized by 2% towards the end of financial year 2022. The most heavily affected areas due to this would be Micro, Small and Medium Enterprises, and retail segments due to higher accretion of NPAs and stressed assets.

The senior director of CRISIL ratings, Krishnan Sitaraman said – “The retail and MSME segments, which together form ~40 per cent of bank credit, are expected to see higher accretion of NPAs and stressed assets this time around. Stressed assets in these segments are seen rising to 4-5 per cent and 17-18 per cent, respectively, by this fiscal end”.

What is CRISIL?

Also known as Credit Rating Information Services of India Limited, it is an Indian entity that provides research, ratings, and advisory to financial institutions. Headquartered in Mumbai, it is the first Credit Rating Agency in India, established in 1988 by ICICI and UTI. Its current Managing Director is Amish Mehta and its present CFO is Sanjay Chakravarthy.

What is NPAs and how does it affect the economy?

Loans and advances that are in arrears/default/un-paid are called Nonperforming Assets or NPA. A loan is classified as being in arrear when interest/principal paid on it is missed. Further, loan is called as default when the debtor is unable to pay it back.

The NPAs are recorded on the balance sheet of a bank. After there is a continuous absence of payments of interest, the bank/lender will compel the debtor to handover all the assets that were listed as security. However if there is no security of the debtor, the bank can write off the asset as a bad debt.

Ideally, debt is classified as NPA when the interest/principal has not been paid on it for duration of 90 days or more. But, the length of the time after which debt can be declared as NPA depends upon the terms and conditions and regulations of that particular loan.

Having Non Performing Asset on the balance sheet leaves a sizeable hole in the economic growth of the lender. No payment of interest negatively affects the lender’s cash flow, thus disturbing the budget of lender and a loss in net profit. If there are large numbers of NPAs on a bank, it is a warning sign that the financial condition of the bank is weak and it may collapse anytime.

Kinds of Nonperforming Assets

  • NPAs can be of many types including term loans, agriculture loans and cash credit.
  • The cash credit accounts are declared NPA when there has been no activity in it for a period over 90 days.
  • Agricultural loans on which no interest was paid for two crop/harvest seasons in short duration crops or one crop season in long-duration crops are termed Nonperforming Assets.

Furthermore, Banks are recommended to term Non-Performing Assets in one of the three classifications. This depends on the fact that how long the asset has been nonperforming. The three classifications are called as:

Substandard Assets, Doubtful Assets, and Loss Assets

If a loan is considered an NPA for less than 12 months, it is called a Substandard asset. A doubtful asset is an asset that is declared NPA for a period of more than 12 months. However, loans on which the lender expects never to be paid back after being under NPA for more than 12 months are called Loss assets. It is written off by the bank and is considered a loss in the bank’s annual Profit & Loss Account.