Sounding alarm bells for the economy, the Reserve Bank of India (RBI) has said the problem of bad loans plaguing the Indian banking sector could worsen towards the end of the ongoing fiscal year.
The central bank said the gross non-performing assets (GNPA) ratio of the country's scheduled commercial banks (SCBs) may increase from 8.5 percent in March 2020 to 12.5 percent by the same period next year, under the baseline scenario. This ratio could, however, soar to 14.7 percent under severe economic stress.
In its Financial Stability Report, the RBI highlighted that the gross NPA ratio fell from 9.3 percent in September 2019 to 8.5 percent by the end of FY20. However, the COVID-19 pandemic and the economic and financial disruption that followed halted the slow improvement that had been achieved in reducing the overhang of stressed assets.
"The regulatory dispensations that the pandemic has necessitated in terms of the moratorium on loan instalments and deferment of interest payments may have implications for the financial health of SCBs, going forward," the central bank noted.
Further, public sector banks (PSBs) may see their GNPA ratio of 11.3 percent in March 2020 increase to 15.2 percent by March 2021 under the baseline scenario.
The gross NPA ratios in respect of construction and gems and jewellery sectors swelled up in March 2020 while the quality of bank loans to the services sector also worsened during this period, according to the report.
Hinting at the need for higher provisioning and the need to adopt loan restructuring to deal with the stressed asset situation, the RBI said, "Globally, banks bracing up for the incidence of bad assets have generally increased their provisions, as a prudential measure."
"Yet, given the potential adverse impact of asset impairment on banking sector capital and profitability, the Basel Committee on Banking Supervision (BCBS) has endorsed strategies such as forbearance/treatment of moratorium, so long as supervisors make sure that the banks use the flexibility prudently and due disclosures are being made so as to enable market participants to assess the rationale and potential impact of such actions by the banks, " the central bank noted.