Covid-19 Impact On Banks’ Books Remains Hidden, Says RBI

The six-month loan moratorium and the subsequent asset quality standstill norms have masked the pain on banks’ balance sheets, according to the Reserve Bank of India.

The gross non-performing asset ratios of certain leading banks should have been higher by 19-60 basis points, if they had continued to report bad loans normally, the RBI said in its latest issue of ‘Report on Trend And Progress of Banking in India’. “Given the uncertainty induced by Covid-19 and its real economic impact, the asset quality of the banking system may deteriorate sharply, going forward.”

The central bank in March allowed a three-month freeze on repayment of term loans, which was extended till Aug 31. According to data available with the regulator, nearly 40% of all such lending remained under moratorium as of August.

During the moratorium, banks were not allowed to report an account as non-performing asset if it was standard as on March 1. The Supreme Court asked lenders not to classify any new account as an NPA after Sept. 1 as the court heard the challenge against compound interest levied by banks during the moratorium. While the government refunded the amount for loans up to Rs 2 crore each, the interim order stays.

That kept NPAs in check even as lenders started disclosing accounts that were declared 'standard' after the Supreme Court order.

Still, RBI said in its report that bad loans have been falling for more than two years. The gross NPA ratio dropped from the highs of nearly 15% in March 2018 to about 7.5% as of September 2020.

One reason for this steady decline in NPAs is higher provisioning by scheduled commercial banks. According to the RBI’s assessment, the net NPA ratio for scheduled commercial banks fell to 2.8% as on March 2020 and further to 2.2% by September 2020.

But the fall has largely been led by an increase in write-offs, which have been steadily rising since March 2018.

“NPAs older than four years require 100% provisioning and, therefore, banks may prefer to write them off. In addition, banks voluntarily write off NPAs in order to clean up their balance sheets, avail tax benefits and optimise the use of capital," the RBI said in the report. "At the same time, borrowers of written-off loans remain liable for repayment.”

Large borrower accounts, or those with exposures worth Rs 5 crore and above, constituted 79.8% of NPAs and 53.7% of total loans as of September 2020.

In the financial year ended March 2020, public sector banks saw their gross NPA ratio and the ratio of restructured standard assets to large borrower accounts trending downward, the RBI said. For private banks, the share of such accounts in NPAs rose.

The stress in large borrower accounts is also reflected in the way banks reported special mention accounts to the RBI. Most large accounts have stayed away from the one-time debt restructuring scheme announced by the regulator in August. It allows borrowers to defer their repayments by up to two years without being classified as NPA. The deadline is Dec. 31.

According to data available with the central bank as of September 2020, private and public sector banks saw the ratio of SMA-0, or accounts in default for less than 30 days since due date, rise beyond the March 2019 levels. This had dipped for both in March 2020.

The rise in SMA-0 accounts points to some amount of initial stress among borrowers, which could translate into either a spike in restructured accounts or higher NPAs once the Supreme Court’s interim order is lifted.

Loans belonging to accounts that have been in default for 31-60 days and those due for repayment for 61-90 days remain under control.