Financial Stability Report: RBI Expects Bank NPAs To Rise To 9.9% By September  2020
A security guard stands by a Reserve Bank of India (RBI) logo in the RBI building in Mumbai, India. (Photographer: Karen Dias/Bloomberg)

Financial Stability Report: RBI Expects Bank NPAs To Rise To 9.9% By September 2020

The Reserve Bank of India expects asset quality of Indian banks to worsen by September next year as the macroeconomic situation hasn’t improved.

Gross non-performing asset ratios for scheduled commercial banks could worsen to 9.9 percent by September 2020 from 9.3 percent in the first half of the current financial year, the RBI’s said in its Financial Stability Report.

According to the stress test conducted by the regulator on Indian banks, the gross NPA ratio could hit 10.5 percent in the worst-case scenario. That, according to the central bank, is if the gross domestic product growth tumbles to 2.9 percent by March 2020 and 3 percent by March 2021.

The assessment of worsening asset quality is at odds with the regulator’s June report when it said gross NPAs of banks had started to come down.

Financial Stability Report: RBI Expects Bank NPAs To Rise To 9.9% By September  2020

Also read: Stressed Assets Rise Again In First Half Of FY20, Shows RBI Report

According to the report, under the baseline scenario:

  • Gross NPA ratios for public sector banks may increase to 13.2 percent by September 2020 from 12.7 percent in September 2019.
  • For private banks, gross bad loans may rise to 4.2 percent from 3.9 percent;
  • For foreign banks, the gross NPAs may increase to 3.1 percent from 2.9 percent.

The share of large borrowers in scheduled commercial banks’ total loan portfolios and their share in gross NPAs was at 51.8 percent and 79.3 percent, respectively, in September. That’s lower than 53 percent and 82.2 percent, respectively in March.

In the large borrower accounts, the proportion of funded amounts outstanding with any signs of stress—including special mention accounts, restructured loans and NPAs—increased from 20.9 percent in March to 21.2 percent in September. Loans with overdues between 60 and 90 days increased by about 143 percent in the first six months of the ongoing fiscal.

Capital Adequacy Could Weaken

Under the assumed baseline macro scenario, the capital adequacy ratio for a system of 53 banks is projected to come down to 14.1 percent by September 2020 from 14.9 percent in September 2019. It will further deteriorate under the stress scenarios.

Three banks may see their capital adequacy ratio go below the minimum regulatory level of 9 percent by September 2020 without considering any further planned recapitalisation, the report said. But if macroeconomic conditions deteriorate, five banks may record CRAR below 9 percent under a severe-stress scenario, the RBI said.

Under a severe shock if the gross NPA ratio of 52 select scheduled commercial banks moves up to 15.6 percent from 9.4 percent, the system-level capital adequacy ratio will decline from 14.9 percent to 11.2 percent, the RBI said. Public sector banks would be severely impacted with the capital adequacy ratio of 16 of the 19 state-run lenders likely to fall below 9 percent in case of such a shock.

Also read: Financial Stability Report: RBI Says Financial Sector Risk From Real Estate Loans On The Rise

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