The COVID-19 lockdown, which has greatly impacted industries, will have a bearing on banks which have made loans to them.
The RBI's latest financial stability report predicts a two-decade-high Gross Non-Performing Assets (GNPA) ratio in banks by next March as industries which never defaulted problem were also impacted.
The situation is expected to worsen once the loan moratorium is lifted. Notably, smaller borrowers are a higher share of defaulters than before.
Stress test
The graph depicts the actual % of GNPA in the total loans in March 2020 (blue) and the projected share in March 2021 if macroeconomic conditions remain the same (light yellow), if they go through medium stress (darker yellow), severe stress (pink), and very severe stress (red).
Even if conditions remain the same, the GNPA of all scheduled commercial banks (SCBs) may increase from 8.5% to 12.5% - the highest such ratio since March 2000 as per reports.
Performers suffer
Industries which held a high share of loans which have not yet defaulted once ("good quality loans") are "severely affected by the COVID-19 crisis," the RBI said. These industries and their % share of total good quality loans in PSBs as on March 2020 are tabulated. Data show that even those which usually repay on time may default.
Moratorium matters
As a relaxation to borrowers, the RBI extended the moratorium on term loans till August 31. About 67.9% of all outstanding loans by public banks (PSBs) were under moratorium as of April 30. This means the extent of bad loans in the system is still not known. Once the moratorium lifts, the defaults may go up even further.
Small trouble
The graph shows the % of large borrowers (>5 crore) in SCB's gross loans and GNPAs. Both figures have come down since March 2018. This suggests that the smaller borrowers are now responsible for a higher share of bad loans than before.
Once the moratorium lifts, and if the borrowers who had opted for it start to default on their loans, a spike could be observed in the Special Mention Accounts (accounts which have high potential to turn into NPAs later) in the September report.