Banking sector asset quality improves defying pandemic woes on borrowers

• Return on equity and liquidity slip as banks accelerate loans while capitalisation remains solid

In a sign of defiance against the pandemic-induced hardships, the banking sector reported improved asset quality amid the other key performance readings for the period ended on September 31, 2021, signalling resilience of the sector to adversity. 

According to the latest industry data worked out by the Central Bank, the overall banking sector gross non-performing loans (NPL) ratio edged down to 4.8 percent by the end of the September quarter, from 5.0 percent recorded in the June quarter, pointing to improved quality in the assets of the sector. 

More specifically, the licensed commercial banks, which account for the bigger slice of the overall banking sector in the system, reported a gross NPL ratio of 4.5 percent, down from 4.6 percent three months ago. 

The licensed specialised banking sector, which typically has a relatively sourer asset quality than their commercial banking sector, reported a gross NPL ratio of 7.8 percent by the end of the September quarter, down from 9.0 percent just three months ago.     However, some banking sector analysts and rating agencies advise caution when interpreting the reported NPL numbers of banks, as much of it could mask the true problematic loans, as a segment of the loans are categorised under moratoria and another section restructured.    Meanwhile, the higher growth in loans reported by the banking sector may have also contributed to the slightly low NPL ratio, as licensed commercial banks particularly gave out a sizeable amount of new loans during the three months to September, compared to the previous quarter dampened by the re-emergence of the pandemic. 

This had some bearing on the excess liquidity of the banks, as they opened their lending spigots by reallocating their liquid assets from low-yielding government securities to high-yielding loans.    For instance, the Statutory Liquid Assets ratio in the domestic banking unit, a measure of rupee liquid assets of the banking sector, edged down to 34.4 percent in September, from 37.5 percent in June. 

In the licensed commercial banks, this ratio fell to 31.1 percent, from 34.1 percent three months ago. 
However, this still remains well above the minimum required 20 percent level by the regulator. 

Meanwhile, the capital adequacy levels of the banking sector remained strong as banks added more capital heft to support their growth aspiration via equity and debt. 

As a result, both Tier I and total capital adequacy ratios of the licensed commercial banking sector stood at 12.9 percent and 16.3 percent, respectively, slightly moved from 13.1 percent and 16.4 percent three months ago. 
The growth and slightly better margins, which were made possible by the build up of higher low-cost deposits, helped the banks to report higher earnings during the July-September quarter.   The return on equity, the measures of return to the equity owners of the licensed commercial banking sector and the sector’s investor allure, fell slightly to 14.5 percent, from 15.8 percent in June.