Slower economic growth, stalled projects, and higher interest rates have pushed the non-performing loans (NPLs) of Indian banks up to a three-year high. Restructured loans and NPLs are much higher for public sector banks (PSBs)—representing more than 70% of the total banking system assets—than private banks. The impaired loan formation rates—restructured loans and net new NPLs—for PSBs have been around 4.5% over the past two years. This rate is more than three times the historical average of India.
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While net new NPL formations have peaked, high leverage in the corporate sector could prevent any meaningful recovery in asset quality of PSBs. A report by Moody’s says poor asset quality and low capitalisation will be major concerns. After provisions, the profitability of these banks will not be enough to generate internal capital for loan growth. The asset quality stress has been mostly concentrated in mid- to large-sized corporate borrowers. Retail loans have seen very good asset-quality trends, while loans to small- and medium-sized enterprises have fared better than loans to mid-to large-sized companies. For instance, the ratio of impaired assets to total assets for key stressed industries such as textiles, metals and infrastructure are over 15%.