Policy roll-back may dent banks’ health, says RBI

Profitability of NBFCs may be ‘dampened’ due to loan impairment, lower credit demand: RBI report

December 29, 2020 07:29 pm | Updated 10:51 pm IST - Mumbai

Logo of Reserve Bank of India (RBI) inside its headquarters in Mumbai. File

Logo of Reserve Bank of India (RBI) inside its headquarters in Mumbai. File

In 2020-21, as policy support is rolled back, the impact of the COVID-19 pandemic may dent the health of the banks and non-banks, the Reserve Bank of India (RBI) said in its Report on Trend and Progress of Banking in India 2019-20.

In order to mitigate the impact of COVID-19, the RBI allowed lending institutions to grant a moratorium on payment of instalments of term loans due between March 1, 2020, and May 31, 2020, which was later extended till August 31, 2020. The report said as at end-August 2020, borrowers accounting for about 40% of outstanding loans of in the financial system (ie banks and NBFCs) had availed of the moratorium allowed by the government.

This is a statutory publication in compliance with Section 36 (2) of the Banking Regulation Act, 1949 and this Report presents the performance of the banking sector, including co-operative banks, and non-banking financial institutions during 2019-20 and 2020-21 so far.

“The data on gross non-performing assets (GNPA) of banks are yet to reflect the stress, obscured under the asset quality standstill with attendant financial stability implications. An analysis of published quarterly results of a sample of banks indicates that their GNPA ratios would have been higher, in the range of 0.10% to 0.66%, at end-September 2020,” it said in the report, which details the performance of the banking sector , including co-operative banks, and non-banking financial institutions duringin 2019-20 and 2020-21 so far. Banks’ gross non-performing assets ratio declined from 9.1% at end-March 2019 to 8.2% in March from 9.1% a year earlier, and further to 7.5% at end-September 2020. The COVID-19 provisioning and ploughing back of dividends would help shield their balance sheets from emanating stress to a certain extent, it said.

The report said preliminary estimates suggested that potential recapitalisation requirements for meeting regulatory purposes as well as for growth capital may be to the extent of 150 basis points (bps) of the common equity tier I (CET I) ratio for the banking system.

“The Financial Stability Report (FSR), to be released shortly, will present an updated assessment of the GNPA and capital adequacy of SCBs under alternate macro stress test scenarios,” it said.

It said while the government had earmarked ₹20,000 crore in the first supplementary demands for grants for capital infusion in public sector banks (PSBs), they may raise more resources from the market as an optimal capital raising strategy.

“Prudently, some major private sector banks (PVBs) have already raised capital, and some large PSBs have announced plans to raise resources in a staggered manner, depending on the prevailing market circumstances,” the report said.

Looking ahead, the banking and non-banking financial sectors face both challenging times and new opportunities as the Indian economy returns to ‘full vitality’. New vistas of financial intermediation, leveraging on technology will open up to be exploited, and new business models will emerge, it added.

NBFCs profitability may dampen due to loan impairment, lower credit demand: RBI report

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