Home / Industry / Banking /  Banks’ bad-loan ratio may rise to 8.1% by Sep: RBI

MUMBAI : Indian banks’ bad loans that stood at 6.9% of total advances as of 30 September may touch 8.1% by September next year under a baseline scenario, and as much as 9.5% under severe stress, a Reserve Bank of India report said.

The half-yearly Financial Stability Report (FSR) uses forecasted values of macroeconomic variables such as gross domestic product (GDP) growth, combined fiscal deficit-to-GDP ratio and retail inflation.

However, RBI said that if the stress conditions do not materialize and the situation improves as compared to the baseline scenario, the gross NPA ratio of banks may moderate.

Stress test
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Stress test

In its last FSR released in July, RBI said the bad loan ratio could be at 9.8% by March 2022 under the baseline scenario.

The central bank assesses the resilience of bank balance sheets to unforeseen external shocks using macro-stress tests and projects impairment and capital ratios over a one-year horizon. Wednesday’s report came with a disclaimer that the adverse scenarios are stringent conservative assessments under “hypothetical adverse economic conditions" and, therefore, these model outcomes should not be interpreted as forecasts.

“As highlighted in this issue of the Financial Stability Report, financial institutions in India have remained resilient amid the pandemic, and stability prevails in the financial markets, cushioned by policy and regulatory support," governor Shaktikanta Das wrote in the report’s foreword, adding that bank balance sheets remain strong and capital and liquidity buffers are being bolstered to cushion against future shocks.

Among different categories of banks, the gross NPA ratio of public sector banks at 8.8% in September 2021 may deteriorate to 10.5% by September 2022 under the baseline scenario; for private banks, it may be from 4.6% to 5.2%; and for foreign banks, from 3.2% to 3.9%.

The stress tests also showed that the system-level capital adequacy ratio may decline to 15.4% by September 2022 under the baseline scenario and 14.7% and 13.8% under the medium and severe stress scenarios, respectively. At the end of the September quarter, the capital adequacy ratio stood at 16.3%.

“The stress tests show that all banks would be able to comply with the minimum capital requirements even under severe stress scenarios," RBI said.

Apart from macro-stress tests, RBI also used stock market indicators in its study and found that the systemic risk in the banking sector receded in 2021 from its elevated level during the first wave of the pandemic.

On the macroeconomic environment, Das wrote that consumer confidence and business optimism are on the rise as vaccination expands.

The outlook, he said, is progressively improving, though there are headwinds from global developments and, more recently, from Omicron.

“Entrenching the recovery hinges on the revival of private investment and shoring up private consumption, which remain below their pre-pandemic levels. Inflation remains a concern buffeted as it is by the build-up of cost-push pressures," Das said.


Shayan Ghosh

Shayan Ghosh is a national writer at Mint reporting on traditional banks and shadow banks. He has over a decade of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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