Gross NPAs at banks may rise to 12.2% by March 2019, says RBI's financial stability report

The banking sector is in for more trouble as bad loans of commercial banks are expected to worsen to 12.2 percent of total loans by March 2019, according to a report published by Reserve Bank of India (RBI).

“Macro-stress tests indicate that under the baseline scenario, SCBs’ GNPA (gross non-performing asset) ratio may rise from 11.6 percent in March 2018 to 12.2 percent by March 2019. The system level capital to risk-weighted assets ratio (CRAR) may come down from 13.5 percent to 12.8 percent during the period,” RBI said in the Financial Stability Report (FSR) released on June 26.

The banking stability indicator showed that deteriorating profitability and asset quality pose elevated risks to overall banking sector stability.

The FSR report highlighted that large borrowers accounted for 54.8 percent of gross advances and 85.6 percent of GNPAs. Top 100 large borrowers accounted for 15.2 percent of gross advances and 26 percent of GNPAs of the scheduled commercial banks.

Stress on banks under PCA

Moreover, tests on banks under the prompt corrective action (PCA) framework suggest worsening of their GNPA ratio from 21.0 percent in March 2018 to 22.3 percent by March 2019, with six such banks likely experiencing capital shortfall.

Currently, there are 11 public sector banks (PSBs) under such framework imposed by the regulator.

The report added that the PCA framework, by addressing the vulnerabilities of weaker banks will help in improving the health of the banking sector.

Only two PSBs - Vijaya and Indian Bank - reported profits in the fourth quarter of FY18. The remaining 19 posted a loss of over Rs 60,000 crore with the highest reported by Punjab National Bank (PNB) at Rs 13,417 crore followed by State Bank of India (SBI) at Rs 7,718 crore.

A sensitivity analysis indicates that a severe shock to GNPA ratio could bring down the CRAR (capital to risk weighted assets ratio) of as many as 20 banks, mostly PSBs below 9 percent.

This is border level capital ratio requirement indicating deterioration in the financial strength of a bank.

Stressed advances ratio to the industry sector increased from 23.9 percent to 24.8 percent, almost one-fourth of total loans.

However, the capital augmentation plan announced by the government will go a long way in addressing potential capital shortfall and will play a catalytic role in credit growth at healthier banks, the central bank added.

Earlier this year, the government had announced plans to inject Rs 2.11 lakh crore over two years in PSBs, of which Rs 90,000 crore was infused in FY18.

The report further warned of growing stress in the housing finance market. The GNPAs in the segment increased to 1.51 percent as of March 2018 from 1.28 percent in March 2017.

Although the current levels are low, given the growing dominance of further lending in retail housing segment, RBI has asked lenders to avoid “any potential dilution in credit standards for incremental growth”.

As per a systemic risk survey (SRS), 40 percent of respondents felt that the prospects of the domestic banking sector are going to improve marginally in the next one year, while the other respondents are still concerned about the continuous rise in NPAs and faltering governance standards in banks.

While growth has been firming up on the domestic front, some caution on inflation and fiscal consolidation is warranted. On global conditions, the FSR report said, “Firming commodity prices, evolving geopolitical developments and rising protectionist sentiments pose added risks.”