Bad loans to spike, but banks may not fall short of capital: RBI

NEW DELHI:  The Reserve Bank of India (RBI) has warned that bad loans are set to see a fresh spike this financial year.

Unlike last year, however, RBI expects banks’ stress level to be less harsh this year—helped by restructuring, write-offs, and regulatory forbearances including a loan moratorium—and all 46 lenders are expected to have sufficient capital to weather the stress.

According to the RBI’s Financial Stability Report released Thursday, the gross non-performing asset (NPA) ratio for the banking sector could rise to 9.8 per cent by March 2022 under a baseline, against 7.48 per cent in March 2021.

But this is only a first estimate with revisions expected during the course of the fiscal year. The current stress tests assume that GDP growth will come in at 9.5 per cent in FY22 and an average retail inflation of 5.1 per cent.

But if the macroeconomic environment worsens into a very stressed scenario, bad loans could be as high as 11.2 per cent and banks may find capital adequacy ratios fall to 13.3 per cent (still higher than the minimum regulatory requirement of 9 per cent).

“The dent on balance sheets and performance of financial institutions... has been much less than what was projected earlier, although a clearer picture will emerge as the effects of regulatory reliefs fully work their way through. Yet, capital and liquidity buffers are reasonably resilient to withstand future shocks, as the stress tests presented... demonstrate,” said RBI Governor Shaktikanta Das.

It is important to note that while the recovery is underway, new risks have emerged, including a still nascent upturn vulnerable to shocks, high international commodity prices, and inflationary pressures as well as global spillovers amid high uncertainty, Das said. 

• 9.8% GNPA ratio by March 2022.

• 7.48% GNPA ratio in March 2021.

• 9.5% GDP growth expected in FY22.