Banking on Stability: A Deep Dive into the Reserve Bank's Asset Quality Report

The Reserve Bank's December 2024 Financial Stability Report reveals that the asset quality of banks has improved, with gross non-performing assets at a 12-year low of 2.6%. Concerns arise over write-offs in private banks, potentially obscuring issues in unsecured lending. Capital buffers and strong earnings boost banking stability.

The Reserve Bank has announced a significant improvement in the asset quality of banks, with the gross non-performing assets (GNPA) ratio dropping to 2.6%—a 12-year low—by September 2024. This is attributed to a decline in slippages and steady credit demand.

However, the Reserve Bank has raised concerns about increased write-offs, particularly in private banks, which may be masking deteriorating asset quality in the unsecured lending sector. The net NPA ratio was recorded at 0.6%, as detailed in the Financial Stability Report of December 2024.

The improved asset quality spans various sectors and banking groups. Despite the positive strides, the liquidity coverage ratio of the banking system fell to 128.5% in September 2024, influenced by rising net cash outflows driven by less stable funding sources. Profitability and resilience indicators for banks also showed growth during the first half of the financial year 2024-25.

(With inputs from agencies.)