FSR red flag: NPAs set to shoot up to 13.5% by Sept, more if severe stress – The Indian Express

With the economy taking a hit in the wake of the Covid pandemic and “a multi-speed recovery struggling to gain traction”, bad loans, or gross non-performing assets (NPAs), of the banking sector are expected to shoot up to 13.5 per cent of advances by September 2021, from 7.5 per cent in September 2020, under the baseline scenario, the Financial Stability Report (FSR) of the Reserve Bank of India (RBI) said.

The FSR has warned that if the macroeconomic environment worsens into a severe stress scenario, the ratio may escalate to 14.8 per cent. “A multi-speed recovery is struggling to gain traction, infusing hope, reinforced by positive news on vaccine development,” RBI Governor Shaktikanta Das said. “Nonetheless, a second wave of infections and new mutations of the virus have spread heightened uncertainty, threatening to stall the fragile recovery,” he added in the report.

“Among bank groups, NPA ratio of PSU banks of 9.7 per cent in September 2020 may increase to 16.2 per cent by September 2021 under the baseline scenario,” the FSR said. Banks managed to bring down their NPAs to 7.5 per cent of advances as of September 2020 from 8.2 per cent in March 2020 and 9.1 per cent in March last year. Banks wrote off a record Rs 2,37,876 crore in fiscal 2019-20, enabling the banks to show lower NPAs, the RBI recently said in its ‘Report on trend and progress of banking in India 2019-20’. The RBI has warned that the modest NPA ratio of 7.5 per cent at end-September 2020 “veils the strong undercurrent of slippage”. Though the RBI had announced moratorium on loan repayments till August 2020, borrowers are saddled with unpaid dues. Banks have sought relief, including a 30-day extension in NPA classification, from the RBI in recognition of stressed loans amid the mounting fears over rising NPAs.

“Given the uncertainty induced by Covid and its real economic impact, the asset quality of the banking system may deteriorate sharply, going forward,” the RBI had said. In absolute terms, gross NPAs declined to Rs 8,99,803 crore in March 2020 from Rs 9,36,474 crore in March 2019.

The FSR said the NPA ratio of private banks and foreign banks may increase from 4.6 per cent and 2.5 per cent to 7.9 per cent and 5.4 per cent, respectively, over the same period. “In the severe stress scenario, the NPA ratios of PSU banks, private banks and foreign banks may rise to 17.6 per cent, 8.8 per cent and 6.5 per cent, respectively, by September 2021. These NPA projections are indicative of the possible economic impairment latent in banks’ portfolios, with implications for capital planning,” the RBI said.

According to the RBI Governor, 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,” Das said.

Banks will also be called to meet funding requirements of the economy as it traces a revival from the pandemic, he said.

“Congenial liquidity and financing conditions have shored up the financial parameters of banks, but it is recognised that the available accounting numbers obscure a true recognition of stress,” he said in the FSR.

RBI cautions against high debt

Mumbai: The RBI has raised concern over the impact of the increasing sovereign debt and the growing disconnect between the financial markets and the real sector.

“In spite of rising public commitments for mitigating the impact of the pandemic, fiscal authorities are also witnessing revenue shortfalls. The resultant expansion in the market borrowing programme of the government has imposed additional pressures on banks,” RBI Governor Shaktikanta Das said in the FSR. “The adverse impact on government revenue and the resultant increase in sovereign borrowing in a period when fiscal authorities are also required to provide stimulus to economic growth, is increasing sovereign debt to levels that have intensified concerns relating to sustainability with crowding out fears in respect of the private sector in terms of both volume of financing and costs thereof,” it said.

“The growing disconnect between certain segments of financial markets and real sector activity, pointed out in the last FSR, has got further accentuated during the interregnum, with abundant liquidity spurring a reach for returns,” the report said.

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