Macro-stress tests conducted by the Reserve Bank of India (RBI) for credit risk show that Scheduled Commercial Banks’ Gross NPA ratio may increase from 6.9 per cent in September 2021 to 8.1 per cent by September 2022 under the baseline scenario and to 9.5 per cent under a severe stress scenario.

Banks’ retail-led credit growth model is heading into headwinds even as inquiry volumes with lenders show credit demand rising from sub-prime consumers, particularly after the Covid second wave, according to the RBI’s latest Financial Stability Report (FSR).

The Report, which includes contributions from all financial sector regulators, noted that delinquencies in the consumer finance portfolio have risen, and the new-to-credit segment, a key driver of consumer credit growth in the pre-pandemic period, is showing a decline in originations.

Referring to BIS, the FSR said an analysis of historical data shows that in emerging market economies (EMEs), non-performing assets (NPAs) typically peak six to eight quarters after the onset of a severe recession.

For the lending industry, comprising public sector banks (PSBs), private sector banks (PVBs) and non-banking finance companies (NBFCs), credit inquiries from the sub-prime segment increased to 29.9 per cent of credit active consumers as at September-end 2021 against 27.2 per cent as at September-end 2020.

General lending standards in the industry have been tightened across lender categories, leading to a drop in approval rates as also moderation in the growth of outstanding balances.

Bank credit growth is showing signs of gradual recovery, although the flow of credit to lower-rated corporates continues to be tepid.

“Signs of incipient stress in micro, small and medium enterprises (MSME) as also in the microfinance segment call for close monitoring of their portfolios,” the Report said.

Stress tests

The stress tests show that all banks would be able to comply with the minimum capital requirements even under severe stress scenarios.

Scheduled Commercial Banks’ slippage ratio rose to 3.6 per cent in September 2021 from 2.5 per cent in March 2021.

Systemic Risk Survey

In the Reserve Bank’s latest Systemic Risk Survey (SRS), all broad categories of risks to the financial system — global, macroeconomic, financial market, institutional, and general — were perceived as ‘medium’ in magnitude, but risks arising on account of global and financial markets were rated higher than the rest.

Commodity prices, domestic inflation, equity price volatility, asset quality deterioration, credit growth and cyber disruptions were rated as the major risks.

Omicron concerns

In his Foreword to the Report, RBI Governor Shaktikanta Das said the growth outlook is improving progressively, though there are headwinds from global developments and more recently from Omicron. “Entrenching the recovery hinges on revival of private investments and shoring up private consumption, which remain below their pre-pandemic levels.

“Inflation remains a concern buffeted as it is by the build-up of cost-push pressures. Strong supply side measures to contain food and energy prices have, however, worked towards moderating these risks,” he said.

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