RBI states that the number of bad loans will rise, but banks would have enough capital to withstand the storm
The RBI has cautioned that bad loans are anticipated to rise sharply this financial year as the second wave of Covid-led disruptions across sectors dents borrowers’ repayment capabilities. However, unlike last year, the central bank anticipates banks to be less stressed this year, thanks to restructuring, write-offs, and regulatory forbearance, including a lending moratorium, and all 46 lenders are projected to have enough capital to weather the storm even in the worst-case scenario. 
According to the RBI’s Financial Stability Report (FSR), the banking sector’s gross non-performing asset (NPA) ratio might climb to 9.8% by March 2022, compared to 7.48 per cent in March 2021, based on a baseline.
However, if the macroeconomic climate worsens, bad loans might reach 11.2 per cent, and banks’ capital adequacy ratios could reach 10.73 per cent (still greater than the minimum regulatory requirement of 9%) by March 2022. To be clear, this is just a preliminary estimate, and modifications are expected during the fiscal year. The present stress tests estimate a 9.5 per cent GDP growth rate in FY22 and a 5.1% average retail inflation rate.
The stress tests, according to the RBI, do not amount to forecasting. “They point to the possibility of hidden economic deterioration in bank assets, with ramifications for capital markets.”
Last year, stress testing expected a 12.5 per cent increase in problematic loans, while the actual increase was only 7.5 per cent. For the past four years, it’s been the same.
The RBI then predicted that GNPAs would be about 13.5 per cent in September 2021 under the baseline scenario, and 14.8 per cent in a severe stress scenario in January. The gap between the January estimate and the current report, however, was explained by the central bank as a result of estimation of bad loans based on previous slippage ratio and GNPA ratio due to a standstill order against loans being categorised as NPAs.
The Supreme Court abolished the ban on loans being classed as nonperforming assets (NPAs) in March 2021, allowing the central bank to conduct stress tests using standard procedures, according to the article. “The impact on Indian financial institutions’ balance sheets and performance has been substantially less than anticipated, while the full impact of regulatory reliefs will become obvious when the impacts of regulatory reliefs play out. However, as the stress tests reported in this paper show, solvency buffers are sufficiently resilient to potential shocks “RBI said, Governor.
“While the recovery is underway, new risks have emerged on the horizon, including the still nascent and mending state of the upturn, which is vulnerable to shocks and future waves of the pandemic, international commodity prices and inflationary pressures, global spillovers amid high uncertainty, and rising incidence of data breaches and cyber-attacks,” Das said.
Credit expansion is slowing.
Meanwhile, due to constrained capital expenditure plans and weaker discretionary spending compared to pre-pandemic levels, the RBI forecasts credit growth to continue sluggish in FY22. Despite a low base last year, gross bank credit growth reached 6% in May 2021, thanks to the Centre’s credit guarantee initiatives.
Thanks to corporates swiftly deleveraging by repaying high-cost loans with cash acquired through bond issuances, credit growth this year are anticipated to linger near FY21 levels (5.56 per cent, a 59-year low), according to a recent report by SBI’s research wing, Ecowrap. According to Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, “corporate readiness for fresh investments remains tepid as the economy is still recovering from the devastating second wave.”
MSME and retail businesses are under a lot of pressure.
The Reserve Bank of India has warned banks about the dangers of lending to small firms and consumers.
“While banks’ exposures to higher-rated major borrowers are decreasing, there are signals of stress in the micro, small, and medium-sized enterprises (MSMEs) and retail categories. Despite the restructuring, public sector banks (PSBs) MSME portfolios are under stress.
Private banks recast MSME loans totalling Rs. 11,027 crore, while state-owned lenders retained the lion’s share at Rs. 24,816 crore. Even now, large debtors account for the majority of a bank’s bad debt. Large borrowers accounted for 52.7 per cent of banks’ entire loan portfolio in March 2021, while they accounted for 77.9% of the total GNPA, up dramatically from 73.5 per cent in September 2020.
