NEW DELHI: Sources said, Banks have started stress tests to evaluate the level of bad loans or non-performing assets (NPAs) originated due to economic slowdown triggered by the COVID-19 outbreak.
As financial year has ended, it is advised to undertake the stress test to have a better understanding of the financial health, banking sources said.
No formal communication from the RBI to banks is required as it is part of the normal process, sources added.
The exercise requires to crate and report worst situations on asset quality side and subsequent capital requirements, sources said, adding, it gives early warning about the financial health to the management and the regulator.
“Once accounts are red-flagged, it is imperative for banks to also then conclude it either ways in a reasonable period of time to ensure that appropriate actions are initiated,” said Sanjay Doshi of KPMG India partner (Financial Services Advisory).
He added, timely involvement in such accounts will enable banks to protect and ring-fence good business within the account so that it can fetch optimal recovery.
Financial Stability Report (FSR) which is released by the Reserve Bank of India (RBI), twice a year, gives an idea of stress test at the system level.
The last FSR report, had said the gross non-performing asset ratio of banks likely increase to 9.9 per cent by September 2020 from 9.3 per cent in September 2019, the report was released in December.
It had said, “The stress tests indicate that under the baseline scenario, the GNPA ratios of banks may increase to 9.9 per cent by September 2020, due to change in macroeconomic scenario, marginal increase in slippages and the denominator effect of declining credit growth.”
The report gave indications that state-run banks’ GNPA ratios may increase to 13.2 per cent by September 2020 from 12.7 per cent in September 2019, and for private banks it may rise to 4.2 per cent from 3.9 per cent, under the worst scenario.
Banks net non-performing assets (NNPA) ratio fell down in September 2019 to 3.7 per cent, reflecting increased provisioning, it had said, adding the aggregate provision coverage ratio (PCR) of all banks rose to 61.5 per cent in September 2019 from 60.5 per cent in March 2019.
Both state-run banks and private banks PCRs increased in September 2019.