The six-month loan moratorium and the subsequent asset quality standstill norms have masked the pain on banks’ balance sheets, according to the Reserve Bank of India.

The gross non-performing asset ratios of certain leading banks should have been higher by 19-60 basis points, if they had continued to report bad loans normally, the RBI said in its latest issue of ‘Report on Trend And Progress of Banking in India’. “Given the uncertainty induced by the Covid-19 and its real economic impact, the asset quality of the banking system may deteriorate sharply, going forward,” the RBI said in its report.

Bad loans on banks’ balance sheets, the RBI said in its report, have been falling consistently since March 2018. The gross NPA ratio dropped from the highs of nearly 15% in March 2018 to about 7.5% as of September 2020.

The substantial increase in provisioning by scheduled commercial banks has resulted in lower net NPA ratios over the last two years. According to the RBI’s assessment, the net NPA ratio for scheduled commercial banks fell to 2.8% as on March 2020 and further to 2.2% by September 2020.

But the fall in bad loans has largely been led by an increase in write offs by the lenders. Write-offs by banks, according to the central bank’s assessments, have been steadily rising since March 2018.

“NPAs older than four years require 100% provisioning and, therefore, banks may prefer to write them off. In addition, banks voluntarily write-off NPAs in order to clean up their balance sheets, avail tax benefits and optimise the use of capital. At the same time, borrowers of written-off loans remain liable for repayment,” the RBI said.

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