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Credit rating agency Crisil in its latest report said that banks' gross non-performing assets (NPAs) will reduce further to a decadal low of 3.8 per cent by end of FY2023-24. The agency estimates NPAs to reduce to 4.2 per cent by end of the just concluded FY23 as against 5.9 per cent in the year-ago period. It had earlier estimated NPAs to come at 4 per cent by end of FY24.

Crisil said a major factor influencing the bank NPAs is the improvement in the high-value corporate loanbooks, where the gross NPAs are slated to come below 2 per cent. Corporates have been reducing their leverage through a string of measures, including prepayment of loans as well. Additionally, strengthened risk management and underwriting is also helping the lenders towards lowering the NPAs.

The agency said the banking sector is better capitalised benefiting from recent capital infusion, but the ability to attract deposits to keep pace with an increasing credit growth will be a monitorable. It said the net interest margins, which have increased in FY23 amid a hiking interest rate cycles as the transmission to lending is faster than to deposits, will moderate in FY24. Amid global events, which include some banks in the US going down and frantic actions by regulators in Europe to prevent the contagion, the agency said the Indian banking sector will be able to handle the volatilities. Among other factors, India has had lower levels of interest rate hikes, healthier bank balance sheets with record low NPAs, depositor-funded liabilities and better regulations on asset and investment book management.