The Reserve Bank of India’s (RBI) macro stress test for banks indicates that under the baseline scenario, gross non-performing assets (GNPAs) may fall to 9% by March 2020 from 9.3% in March 2019, the central bank stated in the June 2019 edition of its Financial Stability Report (FSR).
Among the bank groups, public-sector banks’ (PSB) GNPA ratio may decline to 12% by March 2020 from 12.6% in March 2019 under the baseline scenario, whereas that for private banks may decline to 3.2% in March 2020 from 3.7% in March 2019.
In the foreword to the report, RBI governor Shaktikanta Das wrote that the Indian banking sector continues to show improvement as impairment ratios decline and credit growth picks up. “The Public Sector Banks (PSBs) showed a noticeable improvement with recapitalisation. Both provision coverage as well as capital adequacy improved. Understandably, the significant rise in provisioning has impacted the bottomlines of PSBs. Efforts to improve the balance sheets of banks should therefore continue,” he noted.
Under the assumed baseline macro scenario, system-level capital to risk assets ratio (CRAR) is projected to come down to12.9% in March 2020 from 14% in March 2019. Further deterioration of CRAR is projected under stress scenarios.
“As many as five SCBs may have CRAR below the minimum regulatory level of 9% by March 2020 without taking into account any further planned recapitalisation by the government,” the RBI said in the FSR. However, if macroeconomic conditions deteriorate, nine banks may record CRAR below 9% under a severe macro-stress scenario.
The central bank observed that the increased pace at which NPAs were recognised led to the NPA cycle peaking in March 2018. With most of the NPAs already recognised, the NPA cycle turned around, with GNPA ratio declining to 9.3% in March 2019 from over 10% in September 2018.
There was convergence of stressed advances ratio with the GNPA ratio across all bank groups.
The report pointed to the continuing high contribution of large borrowers to stress in the system. The share of large borrowers in banks’ total loan portfolio was 53%, while their share in GNPAs stood at 82.2% at the end of March 2019. The top 100 large borrowers accounted for 16.5% of gross advances and 18.6% of GNPAs of banks.
This was despite a general improvement in the GNPA ratio of the industrial sector between September 2018 and March 2019 to 17.5% from 20%. In contrast, the asset quality profile of banks’ agriculture portfolio marginally deteriorated over the same period, inching up to 8.5% from 8.4%.