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Bank's asset quality that has been under pressure may deteriorate even further if the macroeconomic condition takes a beating, a stress test undertaken by Reserve Bank of India (RBI) suggests.
The quantum of bad loans may cross the 10 per cent mark at the system level in the next financial year, the test suggested.
As per the Financial Stability Report (FSR), published by RBI, the stress test indicated that under the baseline scenario, the Gross Non Performing Assets (GNPA) ratio may increase from 9.1 per cent in September 2016 to 9.8 per cent by March 2017. This could further increase to 10.1 per cent by March 2018.
The public sector banks that have seen a huge pile up of bad loans may be worse hit. The stress test suggests that in this scenario, the PSBs' GNPA ratio may increase to 12.5 per cent in March 2017 and then to 12.9 per cent in March 2018. At the end of quarter ended September, the GNPA ratio for the public sector lenders was at 11.8 per cent.
A sector wise stress test revealed that iron and steel will register the highest NPA followed by construction and engineering in March 2017 as well as in March 2018.
The report also underlines the need to increase the provisioning level for the banks as the stress test points out that the current provisions as percent of the total advances--5.8 per cent for PSBs, 2.3 per cent for private banks and 4.1 per cent for foreign banks as of September 2016 - seem to be insufficient to meet expected losses under the stress scenarios
"At the same time, the global financial crisis has prompted regulators to require banks to undertake stress tests to see if their risk appetite matches their risk taking capacity," stated the FSR report.
The stress test also shows that the capital adequacy positions of the bank will also be affected due to an increase in bad loans. However, these banks will be able to maintain a capital adequacy ratio of the minimum level of 9 per cent.
As a result of higher bad loans and increased provisioning, loan write-offs and decline in net interest income the profit after tax (PAT) for banks at a system level contracted on y-o-y basis in the first half of 2016-17. The PSBs were the worst hit as they continued to record losses and even at a business growth level lagged behind the private banks, stated the report.
Banks may continue to face challenge at a time when they are looking at cleaning up their balance sheets and moreover their capital position may also not be adequate to support higher credit growth.
