RBI stress test warns of bad loan spike

Mumbai, Dec. 29: Gross bad loans of banks may rise from 6.9 per cent in September 2021 to 8.1-9.5 per cent by September 2022 if the omicron variant strikes the economy hard, as per the financial stability report of the Reserve Bank released on Wednesday. The report also said that the rising stress level in the retail loan portfolio of banks—the mainstay of bank credit for many years now— was led by home loans, which grew in double-digits so far this fiscal.

While asset quality improved, with gross non-performing assets (GNPA) and net NPA (NNPA) ratios declining to 6.9 and 2.3 per cent, respectively, in September 2021, the slippage ratio inched up during the same period as private sector banks showed a higher rate of deterioration in asset quality, as per the report.

But, based on the stress tests, the report warns that the GNPA ratio may rise to 8.1 per cent by September 2022 under the baseline scenario and further to 9.5 per cent under severe stress, if the economy is hit by an omicron wave.

Within the bank groups, public sector banks' GNPA stood at 8.8 per cent in September 2021 and may deteriorate to 10.5 per cent by September 2022 under the baseline scenario, while for privatesector lenders, the same may rise from 4.6 per cent to 5.2 per cent, and for foreign banks, it may increase from 3.2 per cent to 3.9 per cent over the same period.

Similarly, the overall provisioning coverage ratio moved up from 67.6 per cent in March 2021 to 68.1 per cent in September 2021.

Banks have not only improved their profitability, asset quality and capital adequacy but will also be able to comply with minimum capital requirements even in a severe stress scenario, as per the macro-stress tests.

However, the same tests on nonbanks indicate that a significant number of them would be hit if there are liquidity shocks and the network analysis points to increasing inter-bank exposure, raising contagion risks.

In sectoral terms, the GNPA ratio for personal loans rose above its level six months ago and a year ago, said the report without offering an exact number. The deterioration was led by housing and auto loans.

The GNPA ratio for the industrial sector continues to decline, though some sub-sectors like food processing, chemical and infrastructure, excluding electricity, saw increases over their March 2021 levels.

Restructuring under the resolution framework 2.0 stood at 1.5 per cent of total advances in September 2021, which covered 81.7 per cent of the borrower accounts where restructuring under the scheme was invoked.

In the case of MSME and retail loans, the restructuring was to the extent of 2.4 per cent of total sectoral advances and covered 80 per cent of borrower accounts where it was invoked, the report said, adding that a clearer picture of the aggregate extent of restructuring will emerge after the moratorium ends this week.