Banks’ GNPA may rise to 13.5%; 14.8% in case of severe stress scenario: RBI FSR – ET BFSI

Banks‘ gross non-performing assets may rise to 13.5% by September 2021, from 7.5% in September 2020 under the baseline scenario, according to the Financial Stability Report (FSR) released by the Reserve Bank of India. The GNPA ratio of PSBs may increase from 9.7% in September 2020 to 16.2% by September 2021; that of PVBs (private banks) to 7.9% from 4.6% in 2020; and FBs’ (foreign banks) from 2.5% to 5.4%, over the same period. Under the baseline scenario, it would be a 23-year-high. The last time banks witnessed such NPAs was in 1996-97 at 15.7%, showed the RBI data.

These projections are indicative of the possible economic impairment latent in banks’ portfolios, with implications for capital planning, noted the report.

“While the RBI has strongly cautioned about a likely surge in NPAs in the coming months, it may not be a surprise given the current economic scenario. Banks that maintain high CRAR should be on a distinctly better footing. Meanwhile, the signs of tapering in fresh Covid-19 infections, and positive developments on the development of vaccines can help faster normalisation of economic activities. Also, it is heartening to note that the RBI remains committed to nurture growth recovery,” said Siddhartha Sanyal, Chief Economist and Head of Research, Bandhan Bank.

In case of severe stress scenario, the GNPA ratios of PSBs, PVBs and FBs may rise to 17.6%, 8.8% and 6.5%, respectively, by September 2021. The GNPA ratio of all SCBs may escalate to 14.8%. This highlights the need for proactive building up of adequate capital to withstand possible asset quality deterioration, said the report.

Stress tests gauge the adequacy of capital and liquidity buffers with financial institutions to withstand severe but plausible macroeconomic and financial conditions. In the face of a black swan event such as the COVID-19 pandemic, it is necessary to tweak regular stress testing frameworks to accommodate the features of the pandemic.

“In view of the regulatory forbearances such as the moratorium, the standstill on asset classification and restructuring allowed in the context of the COVID-19 pandemic, the data on fresh loan impairments reported by banks may not be reflective of the true underlying state of banks’ portfolios. This, in turn, can underestimate the impact of stress tests, given that the slippage ratios of the latest quarter for which data is available are the basic building blocks of the macro-stress testing framework. To tide over this limitation, it is necessary to arrive at reliable estimates of slippage ratios for the last three quarters, while controlling for the impact of regulatory forbearances,” the report said.

The stress tests results also indicated that four banks might fail to meet the minimum capital level by September 2021 under the baseline scenario, without factoring in any capital infusion by stakeholders. In the severe stress scenario, the number of banks failing to meet the minimum capital level may rise to nine

At the aggregate level, banks have sufficient capital cushions, even in the severe stress scenario facilitated by capital raising from the market and, in case of PSBs, infusion by the Government. At the individual level, however, the capital buffers of several banks may deplete below the regulatory minimum.

Hence going forward, mitigating actions such as phase-wise capital infusions or other strategic actions would become relevant for these banks from a micro-prudential perspective, the report stated.

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