Bank bad loans to rise by 620 bps by March, 5 banks may fail to meet capital norms, warns RBI Financial Stability Report

NEW DELHI: Gross bad loans of Indian banks are likely to spike by up to 620 basis points to 14.7 per cent of total assets by the end of this financial year, the Reserve Bank of India’s Financial Stability Report warned on Friday.

“Macro stress tests for credit risk indicate that the GNPA (gross non-performing assets) ratio of all scheduled commercial banks may increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021 under the baseline scenario. [However], if the macroeconomic environment worsens further, the ratio may escalate to 14.7 per cent under very severe stress,” the report said.

The central bank’s estimates are in line with what bankers have been projecting. Uday Kotak, who heads Kotak Mahindra Bank, in the lender’s annual report projected that 4-5 per cent of loans may turn bad due to Covid-19.

The RBI report said the public sector banks’ gross bad loans ratio of 11.3 per cent at the end of March may increase to 15.2 per cent by March 2021 under the baseline scenario. Private banks may see an increase from 4.2 per cent to 7.3 per cent.

The deterioration in asset quality is likely to hit credit position of many banks. Thankfully, many lenders have raised capital from the market in recent months, anticipating a surge in bad loans.

The report said system-level capital adequacy ratio (ratio of capital to advances) may drop from 14.6 per cent in March 2020 to 13.3 per cent by March 2021 under the baseline scenario and to 11.8 per cent under the very severe stress scenario.

“Stress test results indicate that five banks may fail to meet the minimum capital level by March 2021 in a very severe stress scenario. This, however, does not take into account the mergers or any further recapitalisation, which can further increase systemic resilience,” the report said.

The RBI report highlighted another worrying trend. Earlier, most bad loans were concentrated among large borrowers, but the central bank has observed a shift in this trend.

“Large borrowers (with exposure of over Rs 5 crore) accounted for 51.3 per cent and 78.3 per cent of the aggregate loan portfolio and GNPAs, respectively, of SCBs in March 2020. Both these shares have declined since March 2018, implying that, on an incremental basis, credit and NPA accretions are occurring in the small borrower category in the recent period,” the report said.