A macro stress test for banks indicates that under the baseline scenario, gross non-performing assets (GNPAs) may rise from 9.6 per cent in March 2017 to 10.2 per cent by March 2018, the Reserve Bank of India’s (RBI) Financial Stability Report (FSR) revealed on Friday. The report indicated that there might be further downward risks jeopardising the central bank’s estimate for asset quality. “However, if the macroeconomic conditions deteriorate, the GNPA ratio may increase further under such consequential stress scenarios.
Even as GNPAs rose between September 2016 and March 2017, the stressed advances ratio declined. The overall capital to risk-weighted assets ratio (CRAR) of the banking system also improved to 13.6 per cent from13.4 per cent during the period, largely due to an improvement in the capital adequacy of private and foreign banks. The projection for banks’ capital position was more dire. The report said as things stand now, two banks may have CRAR below the minimum regulatory level of 9 per cent by March 2018.
A worsening in macroeconomic conditions may even result in six banks breaching the regulatory threshold. “Under such severe stress scenario, the system level CRAR may decline from 13.3 per cent in March 2017 to 11.2 per cent by March 2018,” the report stated. In such a scenario of severe stress, one bank may even see its common equity Tier 1 (CET 1) capital to risk-weighted assets ratio slip below the minimum regulatory requirement of 5.5 per cent by March 2018, and the system-level CET 1 capital ratio may drop to 8.6 per cent by March 2018 from 10.2 per cent in March 2017.
A breach of the 9 per cent threshold for CRAR or the 6.75 per cent level for CET 1 could trigger prompt corrective action (PCA) against a bank by the RBI. Depending on the degree of variance from the regulatory minimum, PCA may involve restrictions on dividend distribution and/or branch expansion, higher provisioning requirements and/or caps on management compensation and directors’ fees.
Large borrowers account for 56 per cent of gross advances and 86.5 per cent of gross NPAs, whereas, top 100 large exposures account for 15.2 per cent of gross advances. Non-performing accounts within top 100 exposures contribute to 25.6 per cent of gross NPAs of banks.