The gross non-performing assets (GNPAs) of banks may rise to 9.8% by March 2022 under the baseline scenario from 7.48% in March 2021, according to the financial stability report (FSR) of Reserve Bank of India (RBI).
As per the report, the central bank anticipates that, going forward, as banks respond to credit demand in a recovering economy, they will need to reinforce their capital and liquidity positions to fortify themselves against potential balance sheet stress.
“Macro stress tests indicate that the GNPA ratio of banks may increase from 7.48% in March 2021 to 9.80% by the corresponding month in 2022 under the baseline scenario,” the report says.
The GNPA level could be as high as 11.22% under a severe stress scenario, the report says. However, RBI also swiftly sought to play down concerns and says that the banks have sufficient capital, both at the aggregate and individual levels.
The RBI acknowledged that the ferocity of the second wave of COVID-19 has dented economic activity, but also held that monetary, regulatory and fiscal policy measures have helped curtail the solvency risk of financial entities, stabilise markets, and maintain financial stability.
Within lenders, the GNPA ratio of public sector banks (PSBs) could rise to 12.52% by March 2022 from 9.54% in March 2021 under the baseline scenario. This still marks an improvement compared to an earlier grimmer prediction. The FSR in January 2021 had predicted that the banks’ GNPAs might rise to 13.5% by September 2021 under the baseline scenario.
For private sector banks, the transition of the GNPA ratio from baseline to medium to severe stress is from 5.82% to 6.04% to 6.46%. For foreign banks, it is from 4.90% to 5.35% to 5.97%.
Under the baseline and the two stress scenarios, the system level CRAR (capital to risk assets ratio) holds up well, moderating by 30 basis points (bps) between March 2021 and March 2022 under the baseline scenario and by 130 bps and 256 bps, respectively, under the two stress scenarios.
All 46 banks would be able to maintain CRAR well above the regulatory minimum of 9% as of March 2022 even in the worst-case scenario, it says.
The report said the common equity Tier I (CET-1) capital ratio of banks may decline to 12.58% in March 2022 from 12.78% in March 2021, under the baseline scenario.
It would further fall to 11.76% and 10.73%, respectively, under the medium and severe stress scenarios by March 2022.
The report puts forth that COVID-19 increased the risks to financial stability, particularly when the measures taken in the wake of the pandemic are normalised and rolled back.
“The economic recovery remains fragmented and overcast with high uncertainty,” it admits.
Policy support has helped in shoring up financial positions of banks, containing non-performing loans and maintaining solvency and liquidity globally.
While highlighting the stress test results of the pandemic by central banks around the world, the report said the US Federal Reserve, in its June 2020 stress test and additional analysis, found that banks generally had strong levels of capital. Despite this, considerable economic uncertainty remained.
"Central banks across the world are bracing up to deal with the expected deterioration in asset quality of banks in view of the impairment to loan servicing capacity among individuals and businesses," the report points out.
The initial assessment of major central banks is that while banks' financial positions have been shored up, there has been no significant rise in non-performing loans (NPLs) and policy support packages helped in maintaining solvency and liquidity.
The gross bad loan ratio of the non-banking financial company (NBFC) sector stood at 6.4% as on 31 March 2021, compared with 6.8% in the same period last year. Their capital adequacy ratio also improved by 130bps to 25% in the same period, despite the pandemic during 2020-21.
However, the March 2021 data are provisional in nature and based on data of 276 NBFCs of total asset size Rs38.8 trillion.
But microfinance institutions (MFIs), or those classified as NBFC-MFIs and are primarily dependent on bank borrowings for funding, have been undergoing asset quality stress during the pandemic. Their gross NPA ratio has more than doubled to 4.9% in March 2021 from 2% of total advances in March 2020 as business dislocation due to lock-downs dampened recoveries, the RBI report revealed.
“Decline in collection efficiency could impact the liquidity position of NBFC-MFIs negatively and have implications for the quality of their borrowings," RBI FSR says.
Credit extended by NBFCs rose 8.8% year-on-year (y-o-y) during 2020-21 after a deceleration in the preceding year (2019-20).
There are signs of stress emerging in the consumer credit segment. “Consumer credit deteriorated after the loan moratorium programme came to an end in September 2020,” the RBI’s July FSR says. The distribution of customer risk shifted marginally towards the high-risk segment in January 2021 relative to January 2020. Consumer credit portfolios of non-PSBs are seeing incipient signs of stress, the central bank said.
“Going forward, close monitoring on asset quality of MSME (micro, small and medium enterprises) and retail portfolios of banks is warranted,” RBI said.