Losses in loan accounts in banks could double by Sept 2021: RBI report

Losses in loan accounts could nearly double to 13.5 per cent by September 2021 and to as high as 14.8 per cent in a severe-stress scenario resulting from the pandemic, the Reserve Bank of India (RBI) has said.

Were the scenario of severe stress to materialise, the bad loan ratio of the banking system could be the highest since March 1997 when it stood at 15.7 per cent, according to historical data by the RBI.

“Domestically, corporate funding has been cushioned by policy measures and the loan moratorium announced in the face of the pandemic, but stresses would be visible with a lag,” the top bank observed in the December 2020 edition of its financial stability report (FSR).

The GNPA projections are indicative of the possible economic impairment latent in banks’ portfolios with implications for capital planning. “A caveat is in order, though: considering the uncertainty regarding the unfolding economic outlook, and the extent to which regulatory dispensation under restructuring is utilised, the projected ratios are susceptible to change in a non-linear fashion,” the RBI report added.

RBI governor Shaktikanta Das observed that India’s banking system faced the pandemic with relatively sound capital and liquidity buffers built assiduously in the aftermath of the global financial crisis and buttressed by regulatory and prudential measures. Notwithstanding these efforts, the pandemic threatens to result in balance sheet impairments and capital shortfalls, especially as regulatory reliefs are rolled back.

In addition, banks will be called upon to meet the funding requirements of the economy as it traces a revival from the pandemic,” Das added.

Consequently, maintaining the health of the banking sector remains a policy priority and preservation of the stability of the financial system is an overarching goal.

With stress tests pointing to a deterioration in asset quality of banks, early identification of impairment and aggressive capitalisation is imperative for supporting credit growth across various sectors alongside pre-emptive strategies for dealing with potential NPAs, the report highlighted.

The system level capital to risk-weighted assets ratio (CRAR) is projected to drop to 14 per cent in September 2021 from 15.6 per cent in September 2020 under the baseline scenario and to 12.5 per cent under the severe stress scenario. The stress test results indicate that four banks may fail to meet the minimum capital level by September 2021 under the baseline scenario, without factoring in any capital infusion by stakeholders. In the severe stress scenario, the number of banks failing to meet the minimum capital level may rise to nine, the RBI observed.