Financial stability report delayed as govt wants to 'consult' RBI

Different stance on NPAs will be the discussion point; report was slated to release on Wednesday

The Financial Stability Report (FSR), which was scheduled to be released on Wednesday, has been delayed as the government wants to “consult” the Reserve Bank of India on the stance of the report. The new date for the release of the report has been tentatively fixed on January 11 next year.

The discussion will be over the FSR’s stance on the future trend in non-performing assets (NPAs) and that of the government’s, which sources said, is relatively benign.

This divergence in views need to be sorted out as it has a bearing on the recapitalisation (recap) amounts needed for state-run banks. With government finances already stretched, it can still put more pressure if the central bank were to take a more hawkish view on the extent of deterioration in NPAs, and puts this in public domain. It can spook the wider investor community – both domestic and global.

Sources said that the FSR view “may not have been to the comfort of the government, and, therefore, they have to come to an agreement.” More so, with the Union Budget just a tad more than a month away.

The RBI’s Trend and Progress of Banking in India in 2019-20 (T&P:2019-20) had hinted the fiscal headroom may be limited for recap. “While the government has earmarked Rs 20,000 crore in the first supplementary demands for grants for capital infusion in state-run banks, they may raise more resources from the market as an optimal capital raising strategy.”

It had also observed that “preliminary estimates suggested that potential recapitalisation requirements for meeting regulatory purposes as well as for growth capital may be to the extent of 150 basis points of the common equity tier-I ratio for the banking system”. And added that the FSR: December 2020 “… will present an updated assessment of the gross NPAs (GNPAs) and capital adequacy of banks under alternate macro-stress test scenarios.”

“It is possible that the FSR: December 2020 (if the RBI had its way), may have stuck to its position in the FSR: July 2020 of a worsening in NPAs”, said a source.

This report held that “macro-stress tests for credit risk indicate that the GNPA ratio of all banks may increase to 12.5 per cent by March 2021 from 8.5 per. If the macroeconomic environment worsens further, the ratio may escalate to 14.7 per cent under very severe stress”.

Furthermore, the T&P:2019-20 had been categorical that the 0.74 bps improvement in over GNPAs over 2017-18 March veils the strong undercurrent of slippage. “The accretion to NPAs as per the RBI’s income recognition and asset classification norms would have been higher in the absence of the asset quality standstill provided as a COVID-19 relief measure. Given the uncertainty induced by COVID-19 and its real economic impact, the asset quality of the banking system may deteriorate sharply, going forward.”

It was pointed out that “operational risk has emerged as a major source of concern, and the central bank would have liked the standard asset risk provision to be increased from 0.40 bps based on the performance on individual banks.” This is because the current framework for capital charge on operational risks is a certain percentage of their gross income even as state-run banks are either making losses or having negligible profits in the past few years. At the same time, these banks are reporting the maximum frauds from their advances and in the Indian context rather than from operational risks. To that extent, the capital charges are not being properly captured.

During March-September 2020, frauds stood at Rs 64,681 crore, lower by nearly 50 per cent from the Rs 1,13,374 crore for the same period in 2019. Although 98 per cent of frauds in terms of value were related to loans, their occurrence was spread over several previous years.

Now, tier-1 capital must be at least 5.5 per cent of the risk-weighted assets (RWAs) -- credit risk, market risk and operational risk (including frauds) on an ongoing basis. “But it must be at least 7 per cent of RWAs on an ongoing basis. Thus, within the minimum tier-1 capital, additional tier-1 capital can be admitted maximum at 1.5 per cent of RWAs”, said a source. But because state-run banks are low on profitability, and there is nothing much to be pulled from under this head for operational risks (frauds) by way of “proxy capital” – annual profits which could go into the reserves or existing equity capital.