RBI releases financial stability report
Reserve Bank of India (RBI) released its 22nd issue of the financial stability report (FSR). This report reflects the collective assessment of the sub-committee of the Financial Stability and Development Council (FSDC) on risks to financial stability, and the resilience of the financial system in the context of the simultaneous issues relating to development & regulation of the financial sector.
“Policy induced easy liquidity and financing conditions in response to the COVID-19 pandemic-enabled improvement in lending rates, profitability and capital adequacy of banks with some moderation in balance sheet stress; however, bank credit has remained subdued. Macro stress tests indicate deterioration in scheduled commercial banks (SCB) asset quality and capital buffers as regulatory forbearance get wound down. Contagion risks have receded with the shrinking of the interbank market. In the non-bank space, dominant positions occupied by mutual funds and insurance companies as fund providers continued, with non-banking financial companies (NBFC) and housing finance companies (HFC) turning out to be the largest borrowers”, said the FSR.
Asset quality and capital adequacy
In September 2020, the gross non-performing assets (GNPA) and net NPA (NNPA) ratios of SCB continued to deteriorate and stood at 7.5 per cent and 2.1 per cent, respectively. The slippage ratio contracted sharply for consecutive half-years to 0.15 per cent in September 2020, along with the fall in spread across all bank groups. Slippage ratio can be defined as new accretion to NPA in the quarter as a ratio to the standard advances at the beginning of the quarter. The improvement was significantly aided by the regulatory indulgences extended in response to the COVID-19 pandemic. Having said, the NPA provisions of SCB recorded a marginal decline of 0.2 per cent (YoY basis), with public sector banks (PSB) and foreign banks (FB) decreasing their provisioning whereas, private sector banks (PVB) increasing them. The provision coverage ratio (PCR) of SCB taken together improved across all bank groups and rose from 66.2 per cent in March 2020 to 72.4 per cent in September 2020.
Source: RBI FSR
Source: RBI FSR
The capital to risk-weighted assets ratio (CRAR) of SCB improved considerably by 110 basis points (100 basis points= 1 per cent) to 15.8 per cent in September 2020 compared to 14.7 per cent in March 2020. While PSB recorded an increase of 60 basis points (bps), the improvement was more substantial for PVB and FB by 170 bps and 100 bps, respectively. In the case of SCB, the tier I leverage ratio also increased by 30 bps between March 2020 and September 2020 whereas, PVB and FB being the main contributors, have improved their ratio by 80 bps and 120 bps, respectively. However, the ratio for PSB remained flat. Having said, the actual capital cushion available with the banks could be overstated in view of the regulatory forbearance.
Source: RBI FSR
The stress test suggests that the GNPA ratio of all SCB may increase from 7.5 per cent in September 2020 to 13.5 per cent by September 2021 under the baseline scenario. If the macroeconomic environment worsens into a severe stress scenario, the ratio may elevate to 14.8 per cent. Among the bank groups, the GNPA ratio of PSB may increase from 9.7 per cent in September 2020 to 16.2 per cent by September 2021 under the baseline scenario. Over the same period, the GNPA ratio of PVB and FB might increase from 4.6 per cent and 2.5 per cent to 7.9 per cent and 5.4 per cent, respectively. In the severe stress scenario, the GNPA ratios of PSB, PVB and FB may rise to 17.6 per cent, 8.8 per cent and 6.5 per cent, respectively by September 2021.
These GNPA projections are indicative of the possible economic impairment latent in banks’ portfolios, with implications for capital planning. A caveat is in order though, considering the uncertainty regarding the unfolding economic outlook and the extent to which regulatory dispensation under restructuring is utilised, the projected ratios are susceptible to a change in a non-linear fashion.