Bank NPA at all-time low: What is the driving force?


Apurva Dhamankar

1/21/20242 min read

Let us first understand what are NPAs (Non-Performing Assets)?

Non-Performing Assets or NPA generally refers to loans and advances in the books of Banks or other Financial Institutions where interest or principal payments are not received from a particular period. Generally, debt has been considered NPA if loan payments are outstanding from the past 90 days.

NPAs are a very vital ratio for assessing the health and risk management efficiency of a bank. The higher the NPA, the weaker the financial health of a bank, and the lower the NPA, the stronger the financial health of a bank.

RBI’s Report on Trend and Progress of Banking in India, 2022-23

On 27th December 2023, RBI published a report on Trend and progress of banking in India. According to a report, the gross non-performing assets (GNPAs) fell to a decadal low of 3.2% of scheduled commercial banks in September 2023. The report stated that NPAs declined for all groups of banks.

Asset quality of all the banks improved due to “lower slippages”, with the GNPA of scheduled commercial banks dropping to a 10-year low. In banking, "slippages" refer to the movement of loans or assets from one category to another, typically from performing to non-performing. In the context of a bank's loan portfolio, lower slippages are considered positive as they indicate a healthier and more stable set of loans with a lower risk of defaults. This is beneficial for the bank's overall asset quality and financial performance.

And also due to lower NPAs the provisioning requirement was reduced and with high lending rates banks profitability and capital positions soared.

What were the major driving forces for the reduction in NPAs?

The RBI report stated that a major driving force behind reduced NPAs was a mix of write-offs, upgrades, and recoveries. The report also says that a 45% reduction in GNPAs of scheduled commercial banks was due to recoveries and upgrades.

Let us understand all the 3 terms one by one:

1) Write-offs: The bank wrote off certain loans that were deemed unlikely to be fully recovered. Writing off a loan involves acknowledging the loss and removing it from the active assets, reducing the reported NPA amount.

2) Upgradations: Some loans that were previously classified as non-performing (not generating expected payments) were upgraded to a performing status. This could happen when borrowers improve their financial situation, enabling them to make regular payments on their loans.

3) Recoveries: The bank successfully recovered funds from loans that were previously non-performing. Recovery can occur through various means, such as settlements, legal actions, or improved financial conditions of the borrowers. Recoveries directly contribute to reducing the outstanding NPA amount.

Therefore, these were the major driving forces in the reduction of NPAs to a decadal low.

Thank you.


Milan Purohit,

Kautilya, IBS Mumbai.