The Reserve Bank of India’s Financial Stability Report (FSR) has warned that gross non-performing assets of troubled banks are likely to rise further under the current macro-economic scenario.
“The stress in the banking sector continues as gross NPA ratio rises further. Profitability of SCBs declined, partly reflecting increased provisioning,” the RBI’s FSR said. “Macro-stress tests indicate that under the baseline scenario of current macroeconomic outlook, gross NPA ratio of banks may rise from 11.6 per cent in March 2018 to 12.2 per cent by March 2019,” the report said.
“The system-level capital to risk-weighted assets ratio (CRAR) may come down from 13.5 per cent to 12.8 per cent during the period. Macro-stress tests on public sector banks under prompt corrective action framework suggest worsening of their gross NPA ratio from 21.0 per cent in March 2018 to 22.3 per cent by March 2019, with 6 PSU banks likely experiencing capital shortfall, according to the RBI FSR. Gross NPAs of banks have already crossed the Rs 10,00,000 crore mark in the fiscal ended March 2018.
“Sensitivity analysis indicates that a severe shock to the gross NPA ratio could bring down the CRAR of as many as 20 banks, mostly public sector banks (PSBs), below 9 per cent,” the report warned. The FSR reflects the overall assessment of the stability of India’s financial system and its resilience to risks emanating from global and domestic factors.
According to the RBI report, the PCA framework could help to mitigate financial stability risks by arresting the deterioration in the banking sector, so that further capital erosion is restricted and banks are strengthened to resume their normal operations. Analysis of inter-bank network reveals a reduction in the size of the interbank market coupled with a marginally higher level of interconnectedness in March 2018 as compared with the previous year. “Contagion analysis of the banking network indicates that if the bank with the maximum capacity to cause contagion losses fails, it will cause a solvency loss of about 9.0 per cent of the Tier-I capital of the banking system,” it said.
The gross NPA ratio in the industry sector rose from 19.4 per cent to 22.8 per cent during the same period whereas stressed advances ratio increased from 23.9 per cent to 24.8 per cent. Within industry, the stressed advances ratio of subsectors such as gems and jewellery, infrastructure, paper and paper products, cement and cement products and engineering registered rise in March 2018 from levels in September 2017. The asset quality of food processing, and textiles sub-sectors improved during the same period, the FSR said. Share of large borrowers in the total loan portfolios as well as their share in gross NPAs declined marginally between September 2017 and March 2018. In March 2018, large borrowers accounted for 54.8 per cent of gross advances and 85.6 per cent of GNPAs.