Banks' gross NPA may rise to 12.5% by March 2021: RBI FSR

The resilience of Indian banking in the face of macroeconomic shocks was tested through macro stress tests which attempt to assess the impact of cumulative shocks on banks balance sheet and generate projections of gross non-performing asset (GNPA) ratios and capital to risk-weighted assets ratio (CRARs) over a one-year horizon under a baseline and three adverse -- medium, severe and very severe -- scenarios, the report said.

Gross non-performing assets of all banks may jump to 12.5 per cent by the end of this fiscal under the baseline scenario, from 8.5 per cent in March 2020, according to the Financial Stability Report (FSR) released by the Reserve Bank on Friday. The resilience of Indian banking in the face of macroeconomic shocks was tested through macro stress tests which attempt to assess the impact of cumulative shocks on banks balance sheet and generate projections of gross non-performing asset (GNPA) ratios and capital to risk-weighted assets ratio (CRARs) over a one-year horizon under a baseline and three adverse -- medium, severe and very severe -- scenarios, the report said. "The stress tests indicate that the GNPA ratio of all scheduled commercial banks (SCBs) may increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021 under the baseline scenario.

"If the macroeconomic environment worsens further, the ratio may escalate to 14.7 per cent under the very severely stressed scenario," the report showed. The baseline scenario is derived from the forecasted values of macroeconomic variables such as GDP growth, combined gross fiscal deficit-to-GDP ratio and CPI inflation among others, the report said. As the asset classification in March 2020 could have been influenced by the regulatory moratorium in the face of the COVID-19 pandemic, the projections for this exercise are built up using data from June 2011 up to the quarter ended December 2019 (instead of March 2020), it said. "Given the fact that impact of moratorium is still uncertain and evolving, the exact nature of how the same will play out on the quality of banking assets is difficult to ascertain accurately," it said.

The report said that the regulatory dispensations that the pandemic has necessitated in terms of the moratorium on loan instalments and deferment of interest payments may have implications for the financial health of banks, going forward. Under the baseline scenarios, state-run banks' GNPA ratio may increase to 15.2 per cent by March 2021 from 11.3 per cent in March 2020. The GNPA ratio of private banks and foreign banks may increase from 4.2 per cent and 2.3 per cent to 7.3 per cent and 3.9 per cent, respectively, over the same period. The report said system level CRAR is projected to drop from 14.6 per cent in March 2020 to 13.3 per cent in March 2021 under the baseline scenario and to 11.8 per cent under the very severe stress scenario.

The stress test results indicated that five banks may fail to meet the minimum capital level by March 2021 in a very severe stress scenario. The common equity tier I (CET 1) capital ratio of banks may decline from 11.7 per cent in March 2020 to 10.7 per cent under the baseline scenario and to 9.4 per cent under the very severe stress scenario in March 2021, it showed. The report further stated that while the regulatory moratorium may be holding back some stress, the industry-wise composition of good quality loans of state-run banks and private banks reveals that some of the industries with higher share of such loans across bank groups are severely affected by the COVID-19 crisis. It said the profitability ratios of banks, although better in FY20 compared to FY19, have declined in the second half of FY20 and the outlook is weighed down by the moratorium's implications for loan classification.

It said a liquidity risk analysis was done to capture the impact of a possible run on deposits and increased demand for unutilised portions of sanctioned / committed / guaranteed credit lines.     The report said banks, in general, may be in a position to withstand liquidity shocks with their high-quality liquid assets (HQLAs). Under the assumed scenarios, there would be increased withdrawals of un-insured deposits and a simultaneous increase in usage of the unutilised portions of sanctioned working capital limits as well as utilisation of credit commitments and guarantees extended by banks to their customers, the report said. "Using their HQLAs required for meeting day-to-day liquidity requirements, 50 out 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 report said.