Reserve Bank of India released the 21st Issue of the Financial Stability Report (FSR), which reflects the research of the Sub-Committee of the Financial Stability and Development Council (FSDC), on the risks and recovery of country’s financial system concerning current issues which are affecting the regulation and development of country’s financial arrangement.
As per the stress test conducted by RBI, Indian bank’s bad loans are going to be at the highest in about two decades. To check the resilience of Indian Banking System, RBI conducted the stress test, during the times of shrinkage of our economy, under a baseline and three adverse — medium, severe and very severe — scenarios. The variables included in the test include GDP growth, combined gross fiscal deficit and inflation.
Under the baseline scenario, gross Non-Performing Assets(NPAs) is expected to rise 12.5% of total loans in March 2021, the RBI’s stress test covering 53 scheduled commercial banks showed, as compared to 8.5% of total advances in March 2020. In the worst-case scenario, it can rise as high as 14.7% of total loans.
According to the report, the worst hit will be state-owned banks, which could see their gross NPA ratio increase to 15.2 per cent by March 2020 from 11.3 per cent by March 2021. The gross NPAs of private banks were forecast to increase to 7.3 per cent from 4.2 per cent under the baseline scenario.
Previously, ICRA in June estimated Gross NPAs to rise 1.3-11.6 per cent by March 2021.
System-level capital adequacy ratio could drop to 13.3% by March 2021 from 14.6% at the end of the financial year 2019-20. As per the RBI, the capital adequacy could drop to as low as 11.8%, in a “very severely stressed scenario”.
“Given the fact that the impact of the moratorium is still uncertain and evolving, the exact nature of how the same will play out on the quality of banking assets is difficult to ascertain accurately. Therefore, this will only be ascertainable with the passage of time…,” the RBI said.
Due to Coronavirus countrywide lockdown, all the economic activities are stopped completely, so the RBI has extended the moratorium until 31 August.
The negative impacts of the Coronavirus pandemic on the banking system was expected, but how is our economy going to recover from a very deteriorated position post-COVID is still a big question.