Asset quality issues are far from over for banks if the Reserve Bank of India’s (RBI) financial stability report for December 2021 is any indication. Scheduled commercial banks’ gross non-performing asset (GNPA) ratio may rise to 8.1%-9.5% by September 2022 from a near six-year low of 6.9% in September 2021, the report, released on Wednesday, said.
On Tuesday, RBI’s trends and progress report had shown the sector’s GNPA ratio declining to 6.9% in September 2021 from 8.2% a year ago, while warning of a deterioration with the rollback of regulatory forbearance.
The FSR said based on the stress tests, the GNPA ratio may rise to 8.1% by September 2022 under the baseline scenario and to 9.5% under severe stress, if the economy is hit by an Omicron wave.
The stress tests showed that all banks would be able to comply with the minimum capital requirements even under severe stress scenarios, the central bank said. However, the same tests on non-banks revealed a significant number of them would be hit if there are liquidity shocks and the network analysis points to increasing inter-bank exposure, raising contagion risks.
Within bank groups, public sector banks’ (PSBs’) GNPAs may deteriorate to 10.5% by September 2022 from 8.8% in September 2021 under the baseline scenario while for private banks, the gross bad loan ratio may rise to 5.2% from 4.6%.
Concerns persist around some segments of retail credit, with PSBs seeing 12.7% of their credit card receivables turning bad as on September 2021. Private banks were better off with an NPA ratio of 3.1% in the credit card segment.
SBI Card is among the top three players in the credit card market, with a share of 19.4% in terms of cards in force and 19% in spends at the end of August 2021. HDFC Bank and ICICI Bank are the other large players in the segment.
“Impairment in consumer credit, measured in terms of the proportion of the portfolio at 90 days past due or beyond, shows signs of stabilisation after the pandemic, but at a fairly higher level for PSBs, relative to other lender categories,” the report said.
In sectoral terms, the GNPA ratio for retail loans rose above its level six months ago as well as a year ago. The deterioration was led by housing and auto loans, the FSR said, with the GNPA ratios at 2.1% and 2.6%, respectively.
The GNPA ratio for the industrial sector continued to decline, though some sub-sectors, including food processing, chemical and infrastructure, excluding electricity, registered increases over their March 2021 levels
RBI did observe that if the stress conditions do not materialise and the situation turns optimistic relative to the baseline, GNPA ratio of all banks may moderate.
“The adverse scenarios are stringent conservative assessments under hypothetical adverse economic conditions and, therefore, these model outcomes should not be interpreted as forecasts. The baseline scenario incorporates the forecasted values of macroeconomic variables,” the report said.
Further, stress test results also indicate that the system level capital to risk (weighted) assets ratio (CRAR) may decline to 15.4% by September 2022 from 16.6% in September 2021 under the baseline scenario, and to 14.7% and 13.8% under the medium and severe stress scenarios, respectively. All 46 banks would be able to maintain CRAR above the prescribed minimum capital level of 9% as of September 2022 even in the worst-case scenario, as per the report.
“The common equity Tier I (CET 1) capital ratio of SCBs may reach 12.5% by September 2022 under the baseline scenario and decline to 11.9% and 11.2% under the medium and severe stress scenario, respectively. Even under adverse scenarios, no bank would face a decline of the CET 1 capital ratio below the regulatory minimum of 5.5%,” RBI said.
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