How Strong Is the Asset Quality of Banks in FY25?
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Synopsis
In FY25, Indian banks have made notable strides in asset quality, achieving a low ratio of non-performing assets. This report highlights key trends that are shaping the future of the banking sector, including the shift towards retail lending and the impact of external factors on financial stability. Discover the implications of these changes.
Key Takeaways
- Gross NPA ratio reached 2.3% by end of FY25.
- Retail lending now represents 34% of total advances.
- Decline in NPAs in the industrial sector from 22.8% to 2.7%.
- Public sector banks maintain strong provision coverage ratios.
- Credit costs decreased from 0.86% to 0.41%.
New Delhi, June 13 (NationPress) Indian banks have demonstrated remarkable progress in their asset quality throughout FY25, primarily fueled by minimal net additions to non-performing assets (NPAs), according to a recent report released on Friday.
This positive trend has enabled banks to enhance their balance sheets, while credit costs have consistently decreased, leading to an overall increase in profitability, as per data from CareEdge Ratings.
The report highlighted that the Gross NPA (GNPA) ratio for scheduled commercial banks (SCBs) reached a mere 2.3 percent by the conclusion of FY25, marking one of the lowest figures in recent times.
This advancement has been bolstered by steady recoveries, substantial write-offs, and minimized slippages.
Over the last decade, banks have transitioned their focus from large corporate loans to retail lending, which now constitutes 34 percent of total advances, a significant increase from just 19 percent in 2015.
The decline in NPAs within the industrial sector has been particularly striking, plummeting from 22.8 percent in March 2018 to only 2.7 percent in December 2024.
In agriculture, the GNPA has also decreased to 6.2 percent during the same timeframe. Retail sector NPAs have remained low at 1.2 percent as of December 2024; however, there are emerging concerns regarding stress in unsecured personal loans and credit card debts.
Sanjay Agarwal, Senior Director at CareEdge Ratings, stated: "Net additions to NPAs have remained largely low, allowing the sector to experience a consistent decline in headline asset quality metrics."
"Nevertheless, with the personal loans sector facing pressures, new slippages are anticipated to rise, and recoveries may gradually slow down," he cautioned.
Agarwal also highlighted potential downside risks, including elevated interest rates, regulatory changes, and global challenges such as tariff increases, which could exert further pressure on asset quality.
Public sector banks (PSBs) are particularly well-equipped to absorb potential shocks, boasting robust provision coverage ratios ranging between 75 percent and 80 percent.
While private sector banks generally exhibit lower NPAs, they too maintain substantial buffers.
Credit costs have decreased from 0.86 percent in FY22 to 0.41 percent in FY25, reflecting diminished provisioning demands and improved recoveries.
However, the report indicates that credit costs may have reached their lowest point and could begin to rise again in FY26 due to the stress in short-term retail loans.
Point of View
I emphasize the importance of understanding the shifting dynamics of asset quality in Indian banks. The reported improvements are promising, but they also highlight the need for vigilance in the face of emerging risks. We must remain informed and proactive to ensure the banking sector's stability aligns with national economic interests.
NationPress
08/09/2025
Frequently Asked Questions
What is the recent trend in asset quality for Indian banks?
Indian banks have experienced a significant improvement in asset quality during FY25, with a Gross NPA ratio of just 2.3%, driven by low net additions to NPAs.
What factors contributed to the improvement in asset quality?
The improvement is attributed to steady recoveries, high write-offs, reduced slippages, and a shift from large corporate loans to retail lending.
What are the concerns regarding asset quality?
Concerns include emerging stress in unsecured personal loans and credit card dues, which could lead to increased slippages in the future.
How prepared are banks to handle potential risks?
Public sector banks are well-prepared, maintaining provision coverage ratios between 75% and 80%, while private sector banks also hold solid buffers.
What is the outlook for credit costs in the coming fiscal year?
Credit costs have declined significantly, but they may rise again in FY26 due to stress in short-tenure retail loans.
