The Reserve Bank of India (RBI) has warned that bad debts in the banking system are expected to reach 11.22% of advances under a severe stress scenario. The central bank also warned of emerging signs of stress among medium and small units.
The RBI’s Financial Stability Report said macro stress tests indicate banks’ gross non-performing assets (GNPA) ratio could drop from 7.48% in March 2021 to 9.80% by March 2022 in the reference scenario and at 11.22%. in a severe stress scenario. However, have sufficient capital, both at the aggregate and individual level, even under stress, he said.
Within banking groups, public sector bank NPAs are expected to reach 9.54% in March 2021 and reach 12.52% by March 2022 in the baseline scenario. However, this is an improvement over previous expectations and an indication of protection against the pandemic through regulatory support, he said.
For private banks and foreign banks, the transition of the NPA ratio from the baseline to the severe stress level is 5.82% to 6.04% to 6.46% and 4.90% to 5.35% at 5.97%, respectively.
As banks’ exposures to larger, higher-rated borrowers decline, there are emerging signs of tensions in the micro, small and medium-sized enterprise (MSME) and retail segments, the FSR has warned. Demand for consumer credit by banks and non-bank financial corporations (NBFCs) has eased, with some deterioration in the risk profile of retail borrowers becoming evident, he said.
Domestically, the ferocity of the second wave of COVID-19 has rocked economic activity, but monetary, regulatory and fiscal policy measures have helped reduce the solvency risk of financial entities, stabilize markets and maintain financial stability, according to the FSR. . The capital to risk-weighted assets (CRAR) ratio of listed commercial banks increased to 16.03% and the provision coverage ratio (PCR) stood at 68.86% in March 2021.
Going forward, as banks meet the demand for credit in a recovering economy, they will need to strengthen their capital and liquidity positions to hedge against potential strains on their balance sheets, the RBI FSR said.
According to the RBI, only 0.9 percent of total loans have been restructured. The micro, medium and small enterprise (MSME) sector saw maximum debt recast to 1.7 percent, followed by business loans, which saw 0.9 percent of the sector restructured lending. The retail segment saw only 0.7 percent of restructured loans.
Banks’ recourse to restructuring as part of the COVID-19 resolution was not significant and depreciation as a percentage of GNPA at the start of the year fell sharply compared to 2019-2020, with the exception of banks private, the RBI said.