The economic downturn caused by the COVID-19 pandemic can lead to a rise in bad loans for banks , the Reserve Bank of India (RBI) said in its Financial Stability Report for January 2021. As of September 2020, the gross non-performing assets (GNPA) ratio across all scheduled commercial banks stood at 7.5%.
Under the baseline scenario, the RBI stress tests indicate that the GNPA ratio could rise to 13.5% by September 2021. If the current macroeconomic environment worsens, banks could see a rise in bad loans and the ratio could grow to 14.8% by September 2021, it said.
“These 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.” RBI Financial Stability Report January 2021
The RBI acknowledges that overall, the GNPA and net NPA ratio of banks have continued to decline over the last two years, with fresh slippages during the July to September 2020 quarter pegged at 0.15%. “The improvement was aided significantly by the regulatory dispensations extended in response to the COVID-19 pandemic,” the RBI said.
While public sector banks (PSBs) could see their GNPA ratio grow from 9.7% in September 2020 to 16.2% in September 2021 under the baseline scenario, the GNPA ratio of private banks could increase from 4.6% in September 2020 to 7.9% by September 2021. In a severe stress scenario, the GNPA ratio of PSBs and private banks could increase to 17.6% and 6.5%, respectively, by September 2021, the RBI said.
“In view of the regulatory forbearances such as the moratorium, the standstill on asset classification and restructuring allowed in the context of the COVID-19 pandemic, the data on fresh loan impairments reported by banks may not be reflective of the true underlying state of banks’ portfolio,” it said. Since the RBI allowed banks and other lenders to offer their borrowers a six-month moratorium, beginning in March, on their loan repayments, the recognition of loan defaults was put on hold for several months.
The RBI found that the share of large borrowers to overall bank credit fell to 50.% and as a proportion of GNPAs at a system level fell to 73.5% as of September 2020. While the top 100 large borrowers accounted 17% of the banks’ gross advances and 33.7% of large borrower loans, respectively, there was a rise in loans falling to the into the special mention account (SMA) category.
There was a quarter-on-quarter rise of 155.6% in loans of the top 100 borrowers falling into the SMA-0 category, or repayments for loans that are late by less than 30 days from due date. “The proportion of substandard and doubtful advances contracted while that of loss assets increased, reflecting ageing of the NPA portfolio,” the RBI said.
As a result of this rise in bad loans, the RBI says that the capital adequacy ratio of banks could deteriorate. As of September 2020, the system-wide capital adequacy ratio stood at 15.6% and could drop to 14% by September 2021 under the baseline scenario or 12.5% 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 said.
“Banks 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 RBI added.