On an aggregate basis, NPAs have not risen much. In the March quarter of last year, just before the pandemic started, aggregate NPAs of Scheduled Commercial Banks were 8.3% of Gross Advances. And as of June-2021, NPAs are 7.3%. During the past 5 quarters, NPAs first fell and then have risen in the last two quarters, reflecting the impact of the pandemic as well as the regulatory forbearance. But the net result is that aggregate NPAs are currently lower than what they were just before the start of the pandemic.This suggests that the pandemic has had fairly a benign impact on asset quality.
Beneath the surface however, stress is building up. For one, Restructured Assets have made a comeback. As of June-2021 restructured assets were 1.2% of Gross Advances and thus total stressed assets (GNPAs + Restructured Advances) at 8.5% as of June-2021 are only slightly below the pre-pandemic level (8.7% as of March-2020). Given that the RBI’s window for restructuring of assets (for individuals and small businesses) is open till September-2021, restructured assets will rise further in the current quarter even as reported NPAs remain modest. RBI’s current restructuring window allows, among other measures as part of the restructuring package, deferring of repayments for up to two years and thus the true stress of these restructured accounts, if any, will be apparent thereafter. Thus NPAs, especially those in small ticket size loans, will remain understated for the near future.
Second, even within the reported NPAs, the rosy picture painted by the aggregate data is misleading. Sectorally, NPAs have declined by ~4ppt in the Industrial sector between March-2020 and June-2021. In part this reflects improved corporate profitability in the last few quarters. NPAs have broadly remained stable in Agriculture and Services sectors. But they have increased sharply in Retail loans. In March-2020 NPAs in the Retail loans were just 1.8% which have now increased to 2.8% as of June-2021.
Within the Retail loans, NPA build up is across all key categories except Education loans where NPAs had already been high and have remained high. The biggest rise though is in Credit Card receivables where NPAs have almost doubled from 1.8% as of March-2020 to 3.5% as of June-2021. In Other Retail loans (the residual category after Housing loans, Vehicle Loans, Education Loans, and Credit Cards; and includes general purpose Personal loans) also NPAs have almost doubled from 1.5% as of March-2020 to 2.9% as of June-2021. NPAs have increased in Vehicle loans and Housing loans as well but by a lesser magnitude.
While in absolute terms retail NPAs remain low relative to other sectors, their trajectory, and the fact that the NPAs are possibly under stated due to restructuring is a worrying sign. The rise in NPAs in retail loans (and to a lesser extent in Agriculture) highlights the disproportionate impact of Covid on individuals and smaller businesses. In contrast, the larger corporate sector and the organised businesses have had a relatively benign impact. Furthermore, from the perspective of the broader economy, if this stress in retail loans (and possibly Agriculture) were to continue, it will eventually weigh on consumer spending – and consensus expectation is for consumption growth to see a strong recovery as the economy comes out of the pandemic. This thus represents a key counter to the current bullish perspective on the economy and markets.