Bad debts could rise to 8.1% by September 2022, unless stress eases

MUMBAI Bad loans in the banking sector could reach 8.1% of total advances by September 2022 in the baseline scenario, up 120 basis points (bps) from September this year, said on Wednesday the Reserve Bank of India (RBI).

The macro stress tests for credit risk also show that the gross non-performing asset ratio (GNPA) could drop from 6.9% in September 2021 to 9.5% in September 2022 in a severe stress scenario, RBI said in its semi-annual financial stability report. The baseline scenario uses expected values ​​of macroeconomic variables such as gross domestic product (GDP) growth, combined budget deficit-to-GDP ratio, and retail sales inflation, among others.

However, RBI said that if the stressful conditions do not materialize and the situation improves from the baseline scenario, banks’ gross NPA ratio may moderate.

In the last report released in July, RBI said the bad debt ratio could be 9.8% by March 2022, in the baseline scenario.

The central bank assesses the resilience of bank balance sheets to unforeseen external shocks using macro-stress tests and forecasts depreciation and capital ratios over a one-year horizon. Wednesday’s report comes with a caveat that adverse scenarios are rigorous and conservative assessments under “hypothetical adverse economic conditions” and, therefore, these model results should not be interpreted as forecasts.

“As highlighted in this issue of the Financial Stability Report, financial institutions in India have remained resilient amid the pandemic and stability prevails in financial markets, dampened by political and regulatory support,” Governor Shaktikanta Das wrote. in the foreword to the report, adding that the bank’s balance sheets remain strong and capital and liquidity cushions are strengthened to mitigate future shocks.

Among the different categories of banks, the gross NPA ratio of public sector banks at 8.8% in September 2021 could deteriorate to 10.5% by September 2022 in the baseline scenario; for private banks, the bad debt rate can drop from 4.6% to 5.2%; and for foreign banks, it should drop from 3.2% to 3.9% over the same period.

Stress tests also showed that the system-level capital adequacy ratio could decline to 15.4% by September 2022 in the baseline scenario and to 14.7% and 13.8% in the medium and severe stress scenarios, respectively. The equity ratio at the end of the September quarter of the current fiscal year was 16.3%.

“Stress tests show that all banks would be able to comply with minimum capital requirements even under severe stress scenarios,” RBI said.

In addition to macro stress tests, RBI also used stock market indicators to measure systemic risk in the banking sector and found that systemic risk in the banking sector declined in 2021 from its high level in the first wave of the pandemic.

Regarding the macroeconomic environment, Das wrote that consumer confidence and business optimism are on the rise as the spread and scale of vaccination expands.

The outlook, he said, is gradually improving, although there are headwinds from global developments and more recently from Omicron.

“The anchoring of the recovery depends on the revival of private investment and the strengthening of private consumption, which remain below their pre-pandemic levels. Inflation remains a concern shaken by the build-up of cost pressures, ”Das said.

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