India’s ‘Bad Loans’ Could See a Sharp Jump by September: RBI

As per RBI’s Financial Stability Report, gross bad loans could increase to 13.5 percent by 30 September.

Reserve Bank of India (RBI). 

(Photo: IANS)

The Reserve bank of India (RBI) has estimated that Indian banking system’s “bad loans” could see a sharp jump by September. This is reportedly owing to present macroeconomic climate.

As per the latest edition of RBI’s Financial Stability Report, gross bad loans on bank balance sheets could increase to 13.5 percent by 30 September, reported BloombergQuint (BQ).

Further, in what is being dubbed the “worst case scenario”, the gross bad loans could go as high as 14.8 percent by the second quarter of Financial Year 2021-2022. This would be the highest level it has gone upto in two decades, reported BQ.

According to BQ, gross bad loans stood at 7.5 percent in 2019.

Changes in Gross NPAs

RBI has reportedly said that gross Non Performing Assets (NPAs) have been tumbling consistently over the last two years. In July-September 2020, gross NPAs reportedly stood at 7.5 percent.

Further, the slippage ratio has come down to 0.15 percent as of September.

This improvement, according to the RBI report, “was aided significantly by the regulatory dispensations extended in response to the COVID-19 pandemic.”

However, as per BQ, “public sector banks could see the highest 650-basis-point increase in their gross NPAs even under the baseline scenario”. This means, under the baseline scenario:

• Gross NPAs for government-owned banks are expected to see an increase from 9.7 percent in July-September 2020 to 16.2 percent in July-September 2021.
• Gross NPAs for private banks are expected to see an increase from 4.6 percent in July-September 2020 to 7.9 percent in July-September 2021.

What Else Does the RBI Report Project?

Further, according to BQ, the RBI report projects the system level adequacy ratio to drop from 15.6 percent to 14 percent in September 2021, under the baseline scenario. Under the severe stress scenario, RBI projects it to drop to 12.5 percent.

The report also says that by September 2021, under the baseline scenario, four banks may fail to meet the minimum capital level, and under the sever stress scenario, nine banks will do so.

The RBI also said that overall the banking system’s capital base may be able to tolerate the stress caused by the COVID-19 pandemic. However, some individual banks, according to RBI, may need support through phase wise infusion or other such measures.

Pandemic May Result in Balance Sheet Impairments: RBI Guv

In his forward to the financial stability report, RBI Governor Shaktikanta Das, according to ANI, said that even though the Indian banking system faced the coronavirus pandemic with reasonable capital and liquidity buffers, “the pandemic threatens to result in balance sheet impairments and capital shortfalls, especially as regulatory reliefs are rolled back."

According to Livemint, he also said:

“Banks will be called to meet the funding requirements of the economy as it traces a revival from the pandemic. Consequently, maintaining the health of the banking sector remains a policy priority and preservation of the stability of the financial system is an overarching goal.”   

(With inputs from BloombergQuint, IANS and Livemint.)