Non - performing assets (NPAs or bad loans) weighed down the balance sheets of banks necessitating large provisioning, which adversely affected their profitability, especially of state - run banks during 2018, the Reserve Bank of India (RBI) said on Friday.
In its "Trends and Progress of Banking in 2017 - 18" report, the RBI also said that it is addressing the concerns of non - banking finance companies (NBFCs) over acute liquidity crunch following the series of payment defaults by Infrastructure Leasing & Financial Services (IL&FS) over August - September.
"The overhang of stressed assets weighed down the consolidated balance sheet of the banking sector, necessitating large provisions, which adversely affected their profitability during 2017 - 18, " the central bank report said.
Recent data for the first - half of 2018 - 19, however, indicate that the NPAs have begun to stabilise, "albeit at an elevated level; capital positions have been buffered and the provision coverage ratio has improved".
"The recent concerns about some NBFCs are being proactively addressed.
The consolidated balance sheet of NBFCs expanded in 2017 - 18 and during the first - half of 2018 - 19, " the RBI said.
"The balance sheets of NBFCs, especially that of companies that provide loan finance, have been growing manifold against the backdrop of relative decline in their cost of lending vis - Ã - vis banks and subdued credit growth of scheduled commercial banks in the previous three years. "
The central bank said this year can be considered a watershed in terms of setting up of a "new, comprehensive, decisive and credible" NPAs' resolution framework in February under the mandate of the Insolvency and Bankruptcy Code (IBC).
The new framework requires banks to report a default even if the repayment is due for more than a day.
Thereafter, they are expected to introduce a resolution plan to ensure that the borrower repays the dues on time.
In case the banks are unable to implement the resolution plan within the time limit of 180 days, they have to compulsorily admit the account into the bankruptcy process under the IBC.
According to the report, of the 21 public sector banks (PSBs), the 11 that are under the RBI's Prompt Corrective Action (PCA) framework have shown lower growth in gross non - performing assets (GNPAs) as compared to non - PCA banks.
"The PCA banks have also shown lower growth in GNPAs, relative to non - PCA state - run lenders, " it said.
Those under the PCA are Allahabad Bank, United Bank, Corporation Bank, IDBI Bank, Uco Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Dena Bank and Bank of Maharashtra.
The banks under PCA, which imposes lending restrictions, have also increased recoveries, contained their growth in advances and deposits, reduced riskiness of assets and focused on better rated assets, the RBI said.
"The sharper increase in NPA ratios compared to non - PCA PSBs is also because of decline in advances by the former.
As a result, profitability has taken a hit as reflected in negative return on assets, " the report said.