RBI report suggests gross NPAs of banks may double to 14.8% by Sept 2021

Macroeconomic stress test by the Reserve Bank of India (EBI) suggests that the Scheduled Commercial Banks’ Gross NPAs may increase from 7.5% in September 2020 to 13.5% by September 2021 under the baseline scenario.

In its Financial Stability Report, the apex bank has said that if the macroeconomic environment deteriorates, the Gross NPA may escalate to 14.8% under the severe stress scenario. These projections are indicative of the possible economic impairment latent in banks’ portfolios. Stress tests also indicate that SCBs have sufficient capital at the aggregate level even in the severe stress scenario but, at the individual bank level, several banks may fall below the regulatory minimum if stress aggravates to the severe scenario.

“The need of the hour is for banks to assess their respective stress situations and follow it up with measures to raise capital proactively,” says the report.

At the aggregate level, the CRAR of scheduled urban co-operative banks (SUCBs) deteriorated from 9.70% to 9.24% between March 2020 and September 2020.

NBFCs’ credit grew at a tepid pace of 4.4% on an annual (Y-o-Y) basis as compared with the growth of 22% a year ago. Network analysis indicates that the total outstanding bilateral exposures among constituents of the financial system grew marginally after witnessing a sharp fall as at end-June 2020. SCBs continued to have the largest bilateral exposure in the Indian financial system in September 2020.

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As regards inter-sectoral exposures, asset management companies/mutual funds (AMC-MFs), followed by insurance companies, remained the most dominant fund providers in the system, while NBFCs were the biggest receiver of funds, followed by housing finance companies (HFCs). The continuing shrinking of the inter-bank market as well as better capital position of banks led to decline in risk levels due to contagion effects, says the report.

The report further says that 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.