Bad loans to spike, banks may fall short of capital by March

The Reserve Bank of India has warned of a spike in bad loans and a decline in the capital-to-risk-weighted assets ratio (CRAR) for scheduled commercial banks (SCBs), which are bracing for the full impact of the Covid-19 pandemic, amid deterioration in the macroeconomic and financial environment.

According to the Financial Stability Report (FSR), released by the RBI on Friday, the gross non-performing assets (GNPAs) of SCBs could spike to 12.5 per cent (under baseline scenario) and to 14.7 per cent (in a very severe stress scenario) of the gross advances by end-March 2021, from 8.5 per cent as of end-March 2020. Significantly, GNPAs of SCBs had declined to 8.5 per cent of gross advances as of March-end 2020 from 9.3 per cent as of September-end 2019.

Simultaneously, the system-level CRAR is projected to drop from 14.6 per cent in March to 13.3 per cent in March 2021 under the baseline scenario and to 11.8 per cent under the very severe stress scenario.

The assessment is based on macro stress tests, which take into account the shocks (including the impact of Covid-19) in terms of adverse macroeconomic conditions.

PSBs vs private banks

Among bank groups, public sector banks’ GNPA ratio of 11.3 per cent in March may rise to 15.2 per cent by March 2021 under the baseline scenario. The GNPA ratio of private sector banks and foreign banks may increase from 4.2 per cent and 2.3 per cent to 7.3 per cent and 3.9 per cent, respectively, over the same period.

The RBI cautioned that regulatory dispensations in terms of moratorium on loan instalments and deferring of interest payments may have implications on the financial health of SCBs.

Read also: Build buffers, raise capital on anticipatory basis, says RBI Governor to banks

Governor’s optimistic note

However, in his foreword to the FSR, RBI Governor Shaktikanta Das emphasised that the financial system in India remains sound.

“Nonetheless, in the current environment, the need for financial intermediaries to proactively augment capital and improve their resilience has acquired top priority While risk management has to be prudent, extreme risk aversion would have adverse outcomes for all,” he said.

Das observed that signs of a gradual recovery from the nationwide lockdown are becoming visible. He said the report coincides with a growing disconnect between the movements in certain segments of financial markets and real sector activity.

He said once India enters the post-pandemic phase, the focus will be on calibrated unwinding of regulatory and other dispensations.

“Financial intermediaries will have to undertake a reappraisal of their business models. Asset markets have to adapt to a new normal in a non-disruptive manner. Contagion risks warrant constant vigilance by all stakeholders in the financial system,” the Governor said.

As the focus shifts from pandemic-proofing large sections of society to post-pandemic unwinding of stimulus and support packages in a calibrated manner, the FSR said the challenge would be to establish normalcy without disrupting markets and the health of financial intermediaries.