Asset quality of banks remained stable during pandemic year: RBI FSR

With debt recast at only 0.9% of total loans, banks fare much better than RBI's doomsday projection on bad loans

Banks did not see their bad loan position worsening during the pandemic year of 2020-21 as the gross non-performing ratio stayed stable at 7.48% of the gross advances at the end of March 31, the Financial Stability Report of Reserve Bank of India showed on Thursday.

The stress test conducted by the banking regulator, however, indicated an increase from the March 2021 levels due to the second Covid wave.

The stress tests indicate that the GNPA ratio of commercial banks will increase to 9.8 per cent in the baseline scenario by March 2022 and could increase to 10.36 per cent under medium stress scenarios and 11.22 per cent under severe stress scenarios.

In the Financial Stability report of January, RBI’s stress tests indicate that the GNPA ratio may increase to 13.5 per cent by September 2021 under the baseline scenario and to 14.8% under severe stress scenario.

Within the bank groups, public sector banks’ GNPA ratio is likely to increase from 9.54 per cent in March 2021 to 12.52 per cent by March 2022 under the baseline scenario. This increase is seen as “an improvement over earlier expectations and indicative of pandemic proofing by regulatory support", the central bank said in the Financial Stability Report. Public sector banks' gross NPA was seen increasing to to 16.2 per cent by September 2021 under the baseline scenario in the January report.

For private banks and foreign banks, the transition of the GNPA ratio from baseline to severe stress is from 5.82 per cent to 6.04 per cent to 6.46 per cent, and from 4.90 per cent to 5.35 per cent to 5.97 per cent, the report said.

Gross non-performing assets ratio of banks, which started increasing from March 2011 when it was 2.4%, peaked in March 2018 when it touched 11.5%. Since then, the ratio has been falling, though the Covid-19 pandemic, which resulted in massive economic loss, threatened to disturb the trend. But as the data released today showed, banks fared in the first wave rather well though may face some headwinds due to the second wave. Overall, GNPAs declined by 5.9 per cent, mainly due to a fall of 8.4 per cent in bad loans of PSBs, the report said.

One of the comforting factors for the banks is that they have enough capital to cushion them against asset quality deterioration while provision coverage ratio is at a healthy 68.86%.

“Under the baseline and the two stress scenarios, the system level capital adequacy holds up well,” RBI said adding the ratio is seen moderating by 30 basis points between March 2021 and March 2022 under the baseline scenario and by 130 bps and 256 bps, respectively, under the medium and extreme stress scenarios. All 46 banks would be able to maintain capital adequacy ratio well above the regulatory minimum of 9 per cent as of March 2022 even in the worst case scenario, the report said.

Banks were able to bolster their capital positions during 2020-21 by raising equity through various modes which resulted in capital adequacy ratio of scheduled commercial banks increasing by 130 bps from 14.7 per cent in March 2020 to 16.0 per cent in March 2021, with private banks improving their ratios even further.

The report observed that the asset quality position of the banks has not worsened in 2021 despite loan restructuring being not significant and that loan write-offs fell sharply in FY21 as compared to the previous year. The banking regulator had announced a one-time debt recast scheme last year, which allowed banks to make lower provisions than otherwise.

Data released in the report shows only 0.9% of the total loans were restructured. The micro, medium and small enterprises (MSME) sector saw the maximum debt recast at 1.7% followed by the corporate loans, which saw 0.9% of the sector loan being restructured. Retail segment saw only 0.7% loans restructured.

“…banks’ resort to restructuring under the COVID-19 resolution framework was not significant and write-offs as a percentage of GNPA at the beginning of the year, fell sharply as compared to 2019-20, except for private banks,” the report said.