RBI flags post-covid challenges for banks

Lenders should brace themselves for a tough time once the policy support given during the pandemic is withdrawn, the Reserve Bank of India (RBI) said, warning of a deterioration in asset quality.

Housing financiers, RBI specifically said in its Trends and Progress report released on Tuesday, could see a substantial impairment in their loan assets because of delays in completion of housing projects, cost overruns and delayed investments by home buyers.

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“As of end-August, around 40% of outstanding loans of the financial system availed moratorium. 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,” said the report, which provides details of the performance of the banking sector during this fiscal and the previous one.

The GNPA ratios of banks would have been higher -- in the range of 0.1-0.66% -- at the end of September had RBI not allowed banks to delay recognizing stressed loan accounts as non-performing assets, according to an RBI analysis of the quarterly results of a sample of lenders. Banks will have to set aside money to cover potential losses once they recognize a loan account as non-performing, crimping their profits and ability to lend.

Banks and shadow lenders in India were hit hard by the pandemic and a stringent nationwide lockdown, which brought the economy to a near standstill, impacting the ability of borrowers to repay and demand for loans.

RBI, however, said higher provisioning and ploughing back of dividends could shield banks from stress to a certain extent. Banks have also been raising capital to meet minimum regulatory requirements and to boost credit growth. RBI expects capitalization of Indian banks to increase by 150 basis points (bps) of their common equity tier I ratio.

“While the government has earmarked ₹20,000 crore in the first supplementary demands for grants for capital infusion into public sector banks (PSBs), they may raise more resources from the market as an optimal capital raising strategy. Prudently, some major private sector banks 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.

The central bank added that small finance banks with significant exposure to unsecured loans saw an improvement in their collection efficiency. These banks need to focus on their profitability and improve their provision coverage ratio, RBI said.

For cooperative banks, raising capital at a reasonable cost has emerged as a key challenge. RBI has already initiated the process of identifying weak and vulnerable banks, based on a revised stress-testing methodology. An improvement schedule with specific time-bound targets has been finalized, and continuous monitoring has been put in place, it said.

RBI also said that it is exploring the use of technology to facilitate digital reporting and identifying anomalies in the supervisory reporting data which can be used for predictive analysis. It is striving to establish mechanisms to securely extract specific data sets directly from source systems for a more proactive risk-based supervision, it said.