The Reserve Bank of India (RBI) on Friday said its stress tests indicated that the gross non-performing assets (GNPA) ratio of scheduled commercial banks (SCBs) could worsen to as high as 14.7% by the end of the current financial year, from 8.5% in March 2020, if the adverse economic impact of the COVID-19 pandemic was ‘very severe’.
The macro stress tests for credit risk indicate that the GNPA ratio of all SCBs may increase... to 12.5% by March 2021 under the baseline scenario,” the RBI said in its Financial Stability Report, July 2020. “The ratio may escalate to 14.7% under a very severely stressed scenario,” which assumes hypothetically that the GDP would suffer a contraction of 8.9% in 2020-21, the central bank added. In the baseline case, the GDP is assumed to contract 4.4%.
Observing that the capital to risk-weighted assets ratio (CRAR) of SCBs edged down to 14.8% in March, from 15% in September 2019, the RBI projected that this ratio could slide to “13.3% in March 2021 under the baseline scenario and to 11.8% under the very severe stress scenario”.
Bank credit which had considerably weakened during the first half of 2019-20, slid down further to 5.9% by March 2020 and remained muted up to early June 2020. This moderation was broad-based across all bank groups, the central bank said.
As per network analysis, the total outstanding bilateral exposures among constituents of the financial system narrowed during 2019-20 with the inter-bank market continuing to shrink. With better capitalisation of public sector banks (PSBs), there would be reduction in contagion losses to the banking system under various scenarios in relation to a year ago, the RBI said.
In terms of inter-sectoral exposures, asset management companies/mutual funds (AMC-MFs), followed by insurance companies, were the biggest fund providers in the system, while non-banking financial companies (NBFCs) were the biggest receivers, followed by housing finance companies (HFCs).
On the assessment of systemic risk, the RBI said in its report that the Indian financial system remained stable, notwithstanding the significant downside risks to economic prospects.
The central bank said the near-term economic prospects appear severely impacted by lockdown induced disruptions to both supply and demand side factors, diminished consumer confidence and risk aversion.
While regulators and the government had taken policy measures to ensure financial intermediation functioned normally, and distress faced by disadvantaged sections was mitigated, the RBI said downside risks to short term economic prospects were high.
“The downside risks to growth remain significant and full restoration in economic activity would be contingent upon the support for robust health infrastructure, recovery in demand conditions and fixing of supply dislocations, in addition to the state of global factors like trade and financial conditions,” the central bank observed.
Stating that policy measures had so far kept financial markets from freezing up, and eased liquidity stress facing financial institutions and households, the RBI said borrowing costs had ebbed and illiquidity premia had shrunk.
“Nonetheless, risk aversion and lacklustre demand have impeded the fuller flow of finance from both banks and non-banks into the economy,” it said.
Going forward, the major challenges would be pandemic-proofing large sections of society, especially those that tend to get excluded in formal financial intermediation, the RBI added.