RBI’s Financial Stability Report: Progress may stall, gross NPA ratio likely to rise to 9.9% by Sept 2020

RBI’s Financial Stability Report: Progress may stall, gross NPA ratio likely to rise to 9.9% by Sept 2020

A Federal Reserve Bank of India (RBI) report released on Friday showed that the worst might not be over for banks on the bad loan front as gross non-performing asset (GNPA) ratio of banks may increase to 9.9 per cent by September 2020 from 9.3 per cent in September 2019. The GNPA ratio of banks stood at 9.3 per cent in March 2019, the RBI said in its Financial Stability Report (FSR).

It noted that banks’ credit growth remained subdued at 8.7 per cent year-on-year in September 2019, down from 13.2 per cent in March 2019. Private sector banks registered double-digit credit growth of 16.5 per cent in September 2019. “Given the weakening economic process, the underlying credit buoyancy and its nuances are of relevance,” the report said.

Even as banks have started pursuing recovery of loans and sought resolution under the Insolvency and Bankruptcy Code, the central bank’s report indicates that the trend of rising NPAs is yet to be firmly arrested. “The stress tests indicate that under the baseline scenario, the GNPA ratios of banks may increase to 9.9 per cent by September 2020, thanks to change in macroeconomic scenario, marginal increase in slippages and therefore the denominator effect of declining credit growth,” it said. State-run banks’ GNPA ratios may increase to 13.2 per cent by September 2020 from 12.7 per cent in September 2019, whereas for personal banks it's going to climb to 4.2 per cent from 3.9 per cent, under the strain scenario, it said.

In the event of severe stress, GNPAs may rise to 10.5 per cent by September 2020, the report said. The capital adequacy ratio for a clutch of 53 banks, could slip to levels of 14.1 per cent a year down the road from 14.9 per cent currently during a baseline scenario. It noted while the banking industry has shown signs of stabilisation, state-owned banks’ performance must improve and that they need efforts to create buffers against disproportionate operational risk losses.

The financial institution wrote that NBFCs reported stress in asset quality during H1 2019-20 with the gross NPA ratio rising from 6.1 per cent as at end-March to six.3 per cent as at end-September. internet NPA ratio, however, remained steady at 3.4 per cent during this point. As of end-September 2019, the capital adequacy of the NBFC sector stood at 19.5 per cent, less than 20 per cent as of end-March 2019.

The foreign banks’ gross bad loans may increase to three.1 per cent from 2.9 per cent in September 2019. the mixture provision coverage ratio (PCR) of all banks rose to 61.5 per cent in September 2019 from 60.5 per cent in March 2019. PCRs of both state-run banks and personal banks increased in September 2019. “Following the recapitalisation of state-run by the govt, banks capital to risk-weighted assets ratio (CRAR) improved to fifteen.1 per cent in September 2019 from 14.3 per cent in March 2019,” the report said.

The state-run banks’ CRAR improved to 13.5 per cent from 12.2 per cent during an equivalent period. Bank-wise distribution of asset quality showed that while 24 banks had GNPA ratios of under 5 per cent, four banks had GNPA ratios above 20 per cent in September 2019.

The asset quality of agriculture and services sectors, as measured by their GNPA ratios, deteriorated to 10.1 per cent in September 2019 as compared to around 8 per cent in March 2019. For the industry sector, the slippages during the amount declined to three.79 per cent from around 5 per cent in March 2019.