Banks Gross NPAs may increase 120 bps to 8.1% by September ’22: RBI Financial Stability Report

Macro stress tests for credit risk indicate that the gross non-performing assets (NPAs) of Scheduled Commercial Banks (SCBs) may increase from 6.9% in September 2021 to 8.1% by September 2022 under the baseline scenario and to 9.5% under a severe stress scenario, according to the Reserve Bank of India’s latest Financial Stability Report.

Within the bank groups, public sector banks (PSBs) Gross NPAs of 8.8 per cent in September 2021 may deteriorate to 10.5% by September 2022 under the baseline scenario; for private sector banks, the share of NPAs may rise from 4.6% to 5.2% and for Foreign Banks, it is estimated to increase from 3.2% to 3.9% over the same period.

The report, however, says that if the stress conditions do not materialise and the situation turns optimistic relative to the baseline, gross NPAs of all SCBs may moderate.

Stress test results indicate that the system level Capital adequacy Ratio (CAR) may decline to 15.4% by September 2022 under the baseline scenario and to 14.7% and 13.8% under the medium and severe stress scenarios, respectively. All 46 banks would be able to maintain CRAR above the prescribed minimum capital level of 9% as of September 2022 even in the worst case scenario.

The report further says that the common equity Tier I (CET 1) capital ratio of SCBs may reach 12.5% by September 2022 under the baseline scenario and decline to 11.9% and 11.2% under the medium and severe stress scenario, respectively.

Even under adverse scenarios, no bank would face a decline of the CET 1 capital ratio below the regulatory minimum of 5.5%, the Financial Stability Report says.

The report further says that deposit flows to SCBs have significantly outpaced credit growth in the recent period. However, the active interest rate risk across SCBs has come down, although for PSBs the size of the portfolio held in the active interest rate book has increased.

The report says that under the assumed scenarios of withdrawal of around 15% of un-insured deposits and a simultaneous usage of 75 per cent of the unutilised portions of sanctioned working capital limits, all banks in the sample will remain resilient.

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