Banks’ bad loans may rise to 9.5% by September 2022, says RBI

Mumbai: Gross bad loans of banks may rise from 6.9 percent in September 2021 to 8.1-9.5 percent by September 2022 if the Omicron variant strikes the economy hard, as per the financial stability report of the Reserve Bank released on Wednesday.

The report also said that the rising stress level in the retail loan portfolio of banks – the mainstay of bank credit for many years now – was led by home loans, which grew in double-digits so far this fiscal.

While asset quality improved, with gross non-performing assets (GNPA) and net NPA (NNPA) ratios declining to 6.9 and 2.3 percent, respectively, in September 2021, the slippage ratio inched up during the same period as private sector banks showed a higher rate of deterioration in asset quality, as per the report.

But, based on the stress tests, the report warns that the GNPA ratio may rise to 8.1 percent by September 2022 under the baseline scenario and further to 9.5 percent under severe stress, if the economy is hit by an Omicron wave.

Within the bank groups, public sector banks’ GNPA stood at 8.8 percent in September 2021 and may deteriorate to 10.5 per cent by September 2022 under the baseline scenario, while for private-sector lenders, the same may rise from 4.6 per cent to 5.2 per cent, and for foreign banks, it may increase from 3.2 percent to 3.9 percent over the same period, the report said.

Similarly, the overall provisioning coverage ratio moved up from 67.6 per cent in March 2021 to 68.1 percent in September 2021.

Banks have not only improved their profitability, asset quality and capital adequacy but will also be able to comply with minimum capital requirements even in a severe stress scenario, as per the macro-stress tests.

However, the same tests on non-banks indicate that a significant number of them would be hit if there are liquidity shocks and the network analysis points to increasing inter-bank exposure, raising contagion risks.

In sectoral terms, the GNPA ratio for personal loans rose above its level six months ago and a year ago, said the report without offering an exact number. The deterioration was led by housing and auto loans.

The GNPA ratio for the industrial sector continues to decline, though some sub-sectors like food processing, chemical and infrastructure, excluding electricity, saw increases over their March 2021 levels.

Restructuring under the resolution framework 2.0 stood at 1.5 percent of total advances in September 2021, which covered 81.7 percent of the borrower accounts where restructuring under the scheme was invoked.

In the case of MSME and retail loans, the restructuring was to the extent of 2.4 percent of total sectoral advances and covered 80 percent of borrower accounts where it was invoked, the report said, adding that a clearer picture of the aggregate extent of restructuring will emerge after the moratorium ends on 31 December 2021.

The share of large borrowers in GNPAs fell from 75.9 percent in March 2020 to 62.1 percent in September 2021, and their loans in the special mention account (SMA6) buckets also declined, and the share of top 100 borrowers shrunk marginally to 16.6 percent while their share in GNPA pool fell to 5.7 per cent.

The common equity tier I (CET 1) capital ratio may reach 12.5 per cent by September 2022 under the baseline scenario and decline to 11.9 percent and 11.2 percent under the medium and severe stress scenario, respectively, but even under adverse scenarios, no bank would face a decline of the CET 1 capital ratio below the regulatory minimum of 5.5 percent.

In case of a severe shock, the GNPA ratio of banks may move up from 6.9 percent to 12.7 percent, and the system-level CRAR declines from 16.3 percent to 12.8 percent, and the system-level capital impairment stands at 23.3 percent.

Further, eight banks with a share of 20.2 percent in total assets may fail to maintain the regulatory minimum level of CRAR, and their CRAR would fall below 7 percent in case of these banks, and six of them would record a decline of over 8 percentage points.

The CRAR of urban co-operative banks stood at 12.9 per cent in September 2021, while that of NBFCs was at 26.3 percent.

Network analysis indicated that the total outstanding bilateral exposures among constituents of the financial system have been on an upswing since H1FY21, with banks having the largest share of bilateral exposures albeit still below pre-pandemic levels.

In terms of inter-sectoral exposures, mutual funds, followed by insurers, remained the dominant fund providers, while NBFCs were the biggest receivers of funds, followed by housing finance companies.

The RBI checks the resilience of banks’ balance sheets to unforeseen shocks emanating from the macroeconomic environment using macro-stress tests through which impairment and capital ratios are projected over a one-year horizon under a baseline and two adverse (medium and severe) scenarios.

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