The Reserve Bank of India's (RBI) latest Financial Stability Report has forecasted that the banking system, comprising of all scheduled commercial banks, may witness a gross non-performing assets ratio of 11.22% by March 2022, under a severe stress scenario.
Gross non-performing assets [GNPAs] are also commonly referred to as 'bad loans', or debt that has gone bad for which the bank is yet to make a provision. The GNPA ratio of the banking system at the close of the last financial year (FY21) - on March 31, 2021 - stood at 7.48%.
A severe stress scenario is one of three hypothetical scenarios presented by the RBI for the purpose of forecasting, and the worst among a baseline scenario and a medium-stress scenario, which is better than severe stress but worse than the baseline. However, regardless of the scenarios, the outcome of the RBI's forecasts show that NPAs in the banking system are slated to rise by March 2022, the end of the ongoing financial year.
The latest financial stability report takes into account the damage inflicted by a second brutal wave of the ongoing COVID-19 pandemic in India. While cases are largely lower than at the height of the wave during April-May, business and commercial activity has picked up, but health measures still remain in place and economic activity remains restricted.
"It is important to note in this context that while the recovery is underway, new risks have emerged on the horizon and these include the still nascent and mending state of the upturn, vulnerable as it is 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", said RBI Governor Shaktikanta Das.
Assuming a baseline scenario, by March 2022, the GNPA ratio in the banking system will rise to 9.8%. Under a medium-stress scenario, stress will be moderately more at 10.36%.
The banking system consists of all public banks, private banks and foreign banks, which together form all scheduled commercial banks.
Public sector banks continue to have a large pile of bad loans. At the end of FY21, their GNPA ratio stood at 9.54%. Under a severe stress scenario, nearly 14% of their loans could be sour by the end of the financial year. Private sector banks ended last year with a GNPA ratio of 4.78%, but it could rise to 6.46% under a severe stress scenario. Foreign banks continue to have the cleanest of books with a GNPA ratio of 2.43% at the end of FY21. But this could go up to 5.97% - more than double in terms of percentage points - under a severe stress scenario.
Here's how the RBI forecasts each banking category would perform under various scenarios.
In its financial stability report in January 2021, the RBI similar predicted a worsening of GNPA ratios for the banking system in the first half of the ongoing financial year (September 2021) vis-à-vis September 2020.
In September 2020, it stood at 7.5%, which could worsen to 14.8% under a severe stress scenario by September 2021. This ratio would be at 13.5% in a baseline scenario and 14.1% in a medium-stress scenario.
The RBI has also accounted for three rates of economic growth for the entirety of FY22, one each under a different scenario.
Under a baseline scenario, the economy is expected to grow at 9.5%. This figure is the official growth expectation of the RBI which was downgraded by a 100 basis points (one percentage point from 10.5%); unveiled by Das in the June address of decisions of the Monetary Policy Committee, which meets every two months.
Under a medium stress scenario, growth would be 6.5%, but would be a meagre 0.6% under a severe stress scenario.
This year, the economy is poised to grow at a record rate on the back of a favourable base effect, with institutions like the International Monetary Fund putting its estimate at 12.5% in April.
Find the report entire report here.
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