RBI report: Loan losses at banks could double by Sept 2021

Marco Green
January 12, 2021

"Stretched valuations of financial assets pose risks to financial stability", Mr Das said. "Notwithstanding these efforts, the pandemic threatens to result in balance sheet impairments and capital shortfalls, especially as regulatory reliefs are rolled back", Das said. Banks have sought relief, including a 30-day extension in NPA classification, from the RBI in recognition of stressed loans amid the mounting fears over rising NPAs.

The RBI governor asked banks and financial intermediaries to be cognisant of this risk, given the interconnected nature of the financial system.

"Congenial liquidity and financing conditions have shored up the financial parameters of banks, but it is recognised that the available accounting numbers obscure a true recognition of stress", he said in the FSR.

For public sector banks, the GNPA ratio is estimated to rise to 16.2% by September 2021, under the baseline scenario, from 9.7% a year ago.

Were the scenario of severe stress to materialise, the bad loan ratio of the banking system could be the highest since March 1997, when it stood at 15.7%, according to historical data from the RBI.

The GNPA projections are indicative of the possible economic impairment latent in banks' portfolios, with implications for capital planning.

-Macro stress tests incorporating the first advance estimates of gross domestic product (GDP) for FY21 released on January 7 indicate that the GNPA ratio of all SCBs may increase from 7.5 per cent in September 2020 to 13.5 per cent by September 2021 under the baseline scenario; the ratio may escalate to 14.8 per cent under a severe stress scenario. Hence, going forward, mitigating actions such as phase-wise capital infusions or other strategic actions would become relevant for these banks from a micro-prudential perspective, the report said.

The RBI Governor also said the expansion of the government's market borrowing programme had imposed additional pressure on banks.

Although a recovery in economic activity from the lows of March and April 2020 was under way, it was far from being entrenched and output remained below pre-pandemic levels. Dividend earning from state-run banks is uncertain because the RBI has said that banks are not to make any dividend payment on equity shares from the profits pertaining to the financial year ended March 31, 2020, so that they can support lending. With the inter-bank market continuing to shrink and with better capitalisation of banks, the contagion risk to the banking system under various scenarios declined as compared to March 2020.

The central bank also said that four banks may fail to meet minimum regulatory capital level by September if they fail to infuse capital while under a severe stress scenario, nine banks may fail to meet the minimum regulatory capital level.

"Several banks may fall below minimum regulatory capital at the individual bank level in severe stress".

Other reports by Click Lancashire

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