Indian banks proved the doomsday predictions wrong in a pandemic year

After one year, the actual outcome was somewhat different than what was predicted. The gross NPA figures of the top five banks were lower at the end of the quarter ended March 2021 as compared to what it was a year ago.Experts attributed banks' emergence from from the Covid-19 pandemic without much pain to four main reasons.

The first reason was that these lenders had been cleaning up their balancesheet for the last few years so the number of stressed accounts in the books came down sharply.

Another significant step by the central bank during the Covid-19 pandemic was to cut interest rates sharply – by 115 bps on two occasions, March and May 2020. The cost of funds for banks came down substantially in the last one year. This helped banks generate higher operating profit and better net interest margins, which in turn helped them to take the provisioning hit in a much better way compared to earlier.

A third reason was that many banks, mostly private sector, were able to raise capital during the first and second quarters of FY21 in anticipation of higher provision requirements. As a result, the higher slippages were taken care of by them without much of an issue.

One of the reasons for lower slippages in the retail segment was improvement in the loan repayment culture with the introduction of credit scores.