Bank NPAS may surge to 14.7% in worst case: RBI

FINANCIAL STABILITY REPORT System is safe, but need to remain watchful

The banking system is safe and resilient, thanks to higher capitalisation and shrinking inter-bank linkages, but the pandemic could push up non-performing assets (NPAS) significantly, warned the Reserve Bank of India (RBI) in the bi-annual Financial Stability Report (FSR), released on Friday.

While the downside risk to economic recovery is high, there are early signs of recovery, and “we need to remain extremely watchful and focused”, wrote RBI Governor Shaktikanta Das in the foreword to the report.

The gross NPA ratio of banks may increase from 8.5 per cent in March to 12.5 per cent by March next year under the baseline scenario, but it could worsen to as much as 14.7 per cent under a “very severely stressed scenario”, the FSR said.

The capital to risk-weighted assets ratio (CRAR) of banks has fallen marginally to 14.8 per cent in March 2020 from 15 per cent in September 2019. But the common equity Tier I capital ratio of banks may decline from 11.7 per cent in March to 10.7 per cent under the baseline scenario and to 9.4 per cent under the very severe stress scenario in March 2021.

“Furthermore, under these conditions, three banks may fail to meet the minimum regulatory CET 1 capital ratio of 5.5 per cent by March 2021,” the FSR said.

Banks have enough high-quality liquid assets (HQLAS) for meeting day-to-day liquidity requirements, and 50 of the 53 banks in the sample will remain resilient in a scenario of sudden and unexpected withdrawals of around 15 per cent of deposits, along with the utilisation of 75 per cent of their committed credit lines.

The FSR, written after taking inputs from all regulators, assesses the systemic risk to the financial system, which includes banks, nonbanks, insurance, and capital markets. It is released by the banking regulator with a foreword by the governor.

This time the report has been tweaked important concepts, such as introducing a “very severe” stress scenario in risk analysis, while leaving out some such as frauds in the banking system. Those left out would be part of the annual Trends and Progress Report.

The spread, intensity, and duration of the pandemic have “imparted extreme uncertainty not experienced in our lifetime”, Das wrote in his foreword.

The pandemic hit India at a time when the country was going through a growth slowdown, and coincides with “a growing disconnect between the movements in certain segments of financial markets and real sector activity”. Of late, “signs of a gradual recovery from the nationwide lockdown are becoming visible”, but the overarching objective should be to preserve the long-term stability of the financial system, the governor noted.

The report, however, warned that the near-term economic prospects appeared “severely impacted by lockdown induced disruptions to both supply and demand side factors, diminished consumer confidence and risk aversion”.

Even with measures taken by the regulators and the government, “the downside risks to short-term economic prospects are high”.

As of April 30, 67.9 per cent of PSB loan books were under moratorium, and as many as 80 per cent of their individual borrowers had availed of the moratorium.

For private banks, 31.1 per cent of the book was on moratorium, and for NBFCS, about 49 per cent of the loan book had availed of moratorium as of April 30, the FSR said.