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Home / Industry / Banking /  Delay in RBI report sparks concerns on asset quality

The Reserve Bank of India’s (RBI) unexpected decision to delay the annual Financial Stability Report (FSR) has raised concerns over a possible deterioration in asset quality, even as banking experts await the results of its stress tests.

Even as it deferred the release of the FSR to 11 January, the central bank published its annual Report On Trend And Progress Of Banking In India 2019-20 on 29 December, where it pointed to a likely worsening in banks’ asset quality.

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The delay in FSR comes amid the lack of clarity on asset quality. According to RBI data, 40.4% of all loans were on moratorium as on 31 August, highlighting borrowers’ inability to repay in the aftermath of covid-19. However, bankers maintain that debt recast requests, allowed by RBI after the end of the six-month moratorium, have been much lower than anticipated. RBI’s stress tests typically show how bank asset quality will be affected under a baseline scenario and three adverse scenarios of medium, severe and very severe.

According to the Trend And Progress report, although gross bad loans moderated in FY20 and even so far in FY21, asset quality may sharply deteriorate. The central bank cited the uncertainty induced by the pandemic and its real economic impact to say that asset quality concerns will remain elevated. The moderation in bad loan ratio in September, RBI said, “veils the strong undercurrent of slippage".

“I think that the government does not want the regulator to project bad loan rise to an extent that it creates panic. What the RBI perhaps needs to do in its FSR is to have better disclaimers on how to read the stress test numbers and explain if they are pre-write-offs or post," a senior banking sector analyst said on condition of anonymity.

Banks wrote off 2.37 trillion loans in FY20 and—as RBI said—the asset quality improvement was led by write-offs. The analyst cited above added the upcoming FSR is significant as it will give a sense of what is to come and what to expect after months of moratorium and a tepid response to debt recast.

Analysts at Motilal Oswal Financial Services Ltd said they remain watchful about the asset quality of banks as they recognize non-performing assets from the moratorium and overdue loans. “Though slippages are likely to increase over second half of FY21, particularly after the Supreme Court order ended the moratorium in 31 August, many banks have already provided for this and carry an additional provisions buffer, which should limit the impact on profitability, even as credit cost remains elevated," the brokerage said in a 30 Dec report.

There has been past criticism of RBI’s stress testing models by experts, citing difference between the forecasts and actual asset quality. Soumya Kanti Ghosh, group chief economic adviser, SBI, wrote in November that RBI’s stress testing could have a significant upward bias.

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