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RBI’s financial stability report warns banks against masking bad assets

31 Dec 2024

RBI’s financial stability report warns banks against masking bad assets
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Reserve Bank of India (RBI) in its latest Financial Stability Report has flagged concern over the tendency among banks to mask their gross non-performing assets (GNPAs) by writing off some loans to brighten up their books, saying that this could adversely affect real asset quality.

Unrealistic valuation of assets, dealings with less regulated non-bank financial intermediaries, and emerging threats from new fintech could also add to financial sector uncertainties, the report pointed out.

The warning in the RBI report comes in the backdrop of data showing a sudden improvement in GNPA ratios in the overall financial system (comprising 37 banks) after falling to a decadal low 2.6 per cent in 2024-25.

This multi-year low, according to the RBI report, was achieved by a reduction in slippages, higher write-offs and steady credit demand.

Net NPAs had fallen to 0.56 per cent during the period, according to the report. However, the FSR has noted that the net NPA ratio, ie, the proportion of net non-performing assets in net loans, stood at 0.6 per cent.

Besides, the report pointed to a decline in underwriting standards.

Notably, the report noted that slippages in the unsecured loan book, at 51.9 per cent, accounted for fresh accretion of NPAs in the retail loan portfolios, as of September 2024.

The liquidity coverage ratio in the banking system declined from 135.7 per cent in September 2023 to 128.5 per cent in September 2024, driven by an increase in net cash outflows, resulting from dealings with unsound financial entities.

Meanwhile, the share of large borrowers in GNPA has steadily declined over the past two years.  

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