Decline in bad loans to improve profitability of banks

Contact Counsellor

Decline in bad loans to improve profitability of banks

  • Growth in pre-provision earnings and decline in bad loans will improve profitability of banks in the current fiscal.


  • Capital ratios at Public Sector Banks (PSBs) have improved in the past year, helped by capital infusions from the government.
  • The declining trend in bad loans started in 2018.
  • The gross NPAs of scheduled commercial banks dropped to 6.9 percent as of September 2021.

Current Scenario

  • PSBs as well as their private sector peers have proactively sought to raise capital from the equity capital market.
  • Rated private sector banks had an asset-weighted average Common Equity Tier 1 (CET1) ratio of 15.8 per cent at the end of 2021, which positively positioned them to grow loans as economic conditions improved.
  • Improvements in PSBs' financial health will continue to help them raise equity capital from the market & reduce their dependence on capital support from the government.
  • The gradual increases in domestic interest rates will boost net interest margins.
  • Funding costs will increase marginally because banks have reduced the share of high-cost corporate term deposits in total deposits.
  • Stable asset quality and existing provisions against legacy stressed assets will allow banks to reduce loan-loss provisions.

Common Equity Tier 1 (CET1)

  • Common equity Tier 1 covers liquid bank holdings such as cash, stock, etc.
  • The CET1 ratio compares a bank's capital against its assets.
  • In the event of a crisis, Tier 1 equity is liquidated first.
  • Many bank stress tests employ Tier 1 capital as a beginning point for determining a bank's liquidity and ability to withstand a difficult monetary event.

Non-Performing Loan (NPL)

  • The NPL ratios will decline because of recoveries or write-offs of legacy problem loans while formation of new NPLs will be stable as the economy recovers.
  • Loan growth will help push NPL ratios down by expanding the overall pool of loans.
  • Improving consumer and business confidence as well as improving domestic demand will support economic growth and credit demand.


  • India's economy is expected to recover in the next 12-18 months with GDP growing 9.3 per cent in the year ending March 2022 and 8.4 per cent in the following year.
  • Increasing corporate earnings and easing funding constraints for non-bank finance companies will support loan growth, thus improving the overall financial situation of the country.

Exam Track

Prelims Takeaway

  • Bad Loans
  • Common Equity Tier 1 (CET1)
  • Non-Performing Loan (NPL)

Mains Takeaway

Q. Easing the Financial constraints and allowing Financial institutions to expand their investing is a need for every economy to grow. Analyze.