Banks’ gross NPAs may climb to as much as 14.7% by March: RBI

Health test:Under a severely stressed scenario, RBI hypothesises that GDP would contract 8.9% in FY21.AFPAFP

Health test:Under a severely stressed scenario, RBI hypothesises that GDP would contract 8.9% in FY21.AFPAFP  

Tests show GNPA ratio rising by over 600 basis points under ‘very severe stress’

The Reserve Bank of India (RBI) on Friday said stress tests indicated that gross non-performing assets (GNPA) ratio of scheduled commercial banks (SCBs) could worsen to as high as 14.7% by the end of the current financial year, from 8.5% in March 2020, if the adverse economic impact of the COVID-19 pandemic was ‘very severe’.

“The macro stress tests for credit risk indicate that the GNPA ratio of all SCBs may increase... to 12.5% by March 2021 under the baseline scenario,” the RBI said in its Financial Stability Report, July 2020. “The ratio may escalate to 14.7% under a very severely stressed scenario,” which assumes hypothetically that GDP would suffer a contraction of 8.9% in 2020-21, the central bank added. In the baseline case, the GDP is assumed to contract 4.4%.

Observing that the capital to risk-weighted assets ratio (CRAR) of SCBs edged down to 14.8% in March, from 15% in September 2019, the RBI projected that this ratio could slide to “13.3% in March 2021 under the baseline scenario and to 11.8% under the very severe stress scenario”.

Bank credit which had considerably weakened during the first half of 2019-20, slid down further to 5.9% by March 2020 and remained muted up to early June 2020. This moderation was broad-based across all bank groups, the central bank said.

In terms of inter-sectoral exposures, asset management companies/mutual funds, followed by insurance companies, were the biggest fund providers in the system, while non-banking financial companies (NBFCs) were the biggest receivers, followed by housing finance companies (HFCs).

Financial system ‘stable’

On the assessment of systemic risk, the RBI said in its report that the Indian financial system remained stable, notwithstanding the significant downside risks to economic prospects.

The central bank said the near-term economic prospects appear severely impacted by lockdown induced disruptions to both supply and demand side factors, diminished consumer confidence and risk aversion.

“Full restoration in economic activity would be contingent upon the support for robust health infrastructure, recovery in demand conditions and fixing of supply dislocations,” the central bank observed.

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