Gross non-performing assets (GNPAs) of scheduled commercial banks could spike to 14.7 percent of the total loans by March 2021 in a worse scenario, the Reserve Bank of India (RBI) said in the Financial Stability Report (FSR) on Friday. In a base case scenario, the GNPAs could rise to 12.5 percent by March next year, the RBI said.
“Macro stress tests for credit risk indicate that the GNPA ratio of all SCBs may increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021 under the baseline scenario; the ratio may escalate to 14.7 per cent under a very severely stressed scenario,” the RBI said.
The capital to risk-weighted assets ratio (CRAR) of banks edged down to 14.8 per cent in March 2020 from 15 per cent in September 2019 while their gross non-performing asset (GNPA) ratio declined to 8.5 per cent from 9.3 per cent, the RBI said. At the same time, the provision coverage ratio (PCR) improved to 65.4 per cent from 61.6 per cent over this period, the RBI said.
Moratorium loans impact
“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 RBI said.
In the wake of Covid-19, the RBI had announced a six months loan moratorium to all term loans. The moratorium was first given for March-May but was later extended to June-August. Analysts fear at least 5 per cent of the moratorium loans could turn NPAs if Covid-19 impact persists in the economy.
The COVID-19 lockdown has had a significant impact on all industrial activities in the economy resulting in major income loss to many. This, in turn, has impacted the loan repayment ability of borrowers too. Though the number of people who have availed the moratorium in the second round is far less compared to the first, banks have taken aggressive provisions expecting an asset quality shock.
Sectorally, the quality of bank loans to services sector worsened in March 2020, the RBI said in the FSR report. The GNPA ratio of the retail loan sector also edged up. Among major sub-sectors within the industry, GNPA ratios in respect of construction and gems and jewellery sectors swelled up in March 2020. On the other hand, the infrastructure sector (with a share of 36.2 per cent in bank credit to the industrial sector), basic metals and electricity (17.5 per cent) have shown a perceptible decline in GNPA ratios, the RBI said.
Small borrowers feel the heat
Large borrowers accounted for 51.3 per cent and 78.3 per cent of the aggregate loan portfolio and GNPAs, respectively, of SCBs in March 2020, the RBI said. “Both these shares have declined since March 2018 implying that, on an incremental basis, credit and NPA accretions are occurring in the small borrower category in the recent period, the RBI said. The top 100 borrowers accounted for 17.5 per cent of gross advances, but only 12.6 per cent of GNPAs of SCBs in March 2020, the RBI said.
The central bank noted that banks have recorded deterioration in soundness, liquidity and efficiency in March 2020 as compared with the September 2019 position, whereas asset quality and profitability showed marginal improvement (Chart 2.5). Nevertheless, no comfort can be drawn on this front since any loss of income of banks during COVID-19 will be visible only from the first quarter of 2020-21, the RBI said.
Uncertainty ahead
“Given the fact that the impact of the moratorium is still uncertain and evolving, the exact nature of how the same will play out on the quality of banking assets is difficult to ascertain accurately. Therefore, this will only be ascertainable with the passage of time, and outcomes would be disseminated in the forthcoming publications of RBI, from time to time,” said the RBI report.
Among the bank groups, PSBs’ GNPA ratio of 11.3 per cent in March 2020 may increase 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 said.
Stress test results indicate that five banks may fail to meet the minimum capital level by March 2021 in a very severe stress scenario, the RBI said.
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