Loan losses in the banking sector, as measured by the gross non-performing asset (GNPA) ratio, could almost double to 13.5% by September 2021 in a baseline situation, and to as higher as 14.8% in a extreme-tension situation resulting from the pandemic, the Reserve Bank of India (RBI) stated on Monday. The GNPA ratio stood at 7.5% in September 2020.
Were the situation of extreme tension to materialise, the poor loan ratio of the banking program could be the highest considering that March 1997, when it stood at 15.7%, according to historical information from the RBI.
“Domestically, corporate funding has been cushioned by policy measures and the loan moratorium announced in the face of the pandemic, but stresses would be visible with a lag,” the central bank observed in the December 2020 edition of its economic stability report (FSR).
The GNPA projections are indicative of the attainable financial impairment latent in banks’ portfolios, with implications for capital preparing. “A caveat is in order, though: considering the uncertainty regarding the unfolding economic outlook, and the extent to which regulatory dispensation under restructuring is utilised, the projected ratios are susceptible to change in a non-linear fashion,” the RBI stated.
RBI governor Shaktikanta Das observed India’s banking program faced the pandemic with reasonably sound capital and liquidity buffers constructed assiduously in the aftermath of the international economic crisis and buttressed by regulatory and prudential measures. “Notwithstanding these efforts, the pandemic threatens to result in balance sheet impairments and capital shortfalls, especially as regulatory reliefs are rolled back.
In addition, banks will be called to meet the funding requirements of the economy as it traces a revival from the pandemic,” Das stated. Consequently, preserving the wellness of the banking sector remains a policy priority and preservation of the stability of the economic program is an overarching objective.
With tension tests pointing to a deterioration in asset good quality of banks, early identification of impairment and aggressive capitalisation is crucial for supporting credit development across a variety of sectors alongside pre-emptive tactics for dealing with possible NPAs, the report highlighted.
The program level capital to danger-weighted assets ratio (CRAR) is projected to drop to 14% in September 2021 from 15.6% in September 2020 beneath the baseline situation and to 12.5% beneath the extreme tension situation. The tension test outcomes indicate that 4 banks may well fail to meet the minimum capital level by September 2021 beneath the baseline situation, devoid of factoring in any capital infusion by stakeholders. In the extreme tension situation, the quantity of banks failing to meet the minimum capital level may well rise to nine, the RBI stated.
The prevalent equity tier-I (CET-1) capital ratio of SCBs may well decline to 10.8% from 12.4% in September 2020 beneath the baseline situation and to 9.7% beneath the extreme tension situation in September 2021. Furthermore, beneath these circumstances, two banks may well fail to meet the minimum regulatory CET-1 capital ratio of 5.5% by September 2021 beneath the baseline situation this quantity may well rise to 5 in the extreme tension situation. At the aggregate level, SCBs have adequate capital cushions, even in the extreme tension situation facilitated by capital raising from the marketplace and, in case of PSBs, infusion by the government. At the person level, even so, the capital buffers of a number of banks may well deplete beneath the regulatory minimum. Hence, going forward, mitigating actions such as phase-smart capital infusions or other strategic actions would grow to be relevant for these banks from a micro-prudential viewpoint, the report stated.