Credit Suisse expects asset quality of Indian banks to remain strong over the next few years

The banking sector has posted picture perfect earnings for the second quarter of the ongoing fiscal (FY23). For the sector as a whole, non-performing assets (NPAs) are at five-year-lows, and return on assets at multi-year highs.

Actually it’s a 180-degree change for both private and public sector banks. NPAs were at ugly highs in FY18 (2017-18) and FY19 (2018-19). And from there, have fallen by more than half.

From 2001, the sector saw a sharp decline in NPAs till 2008, especially after 2004 on the back of the 7-8 percent GDP growth.

And thereafter, slower growth led to higher NPAs. In 2016, the Reserve Bank of India's asset quality review, which was a forcible recognition of NPAs, pushed the numbers to shocking highs in FY18-19. Since FY19, it has been a saga of improvement.

Ashish Gupta, Head of India Research at Credit Suisse, believes that asset quality of banks will remain strong in the next few years.

Gupta said, “Not only are the current NPAs low, but the current lending standards that banks have are also still fairly tight. It has been our long-held belief that NPAs come after a period of loosening of credit standards. So at least in the coming couple of years, we expect asset quality trends to remain very strong and credit costs to remain benign.”

Former Deputy Governor of RBI NS Vishwanathan said banks need to be aware and build possibility of black swan events in their strategy.

“Banks, I am sure, have learnt their lessons with NPAs. Also the entire recovery mechanism in India has undergone a big change including the coming in of IBC. Of course, economic growth is important but there is also a clear trend of stress levels being at a reasonably comfortable level. However banks need to be aware and build into their entire capital framework, what can go wrong, which we haven’t seen so far,” Vishwanathan said.

“Banks are in the business of taking risks. So they must take the right risk and be prepared for risks coming from sources that nobody thought of,” he added.