RBI predicts a sharp rise in bad loans
If the
macroeconomic environment continues to worsen, the share of bad debt in the
Indian banking sector could rise to as much as 14.7 percent by March 2021, the
Reserve Bank of India stated in its financial stability report.
The latest report on financial stability
represents the joint evaluation of the sub-committee of Financial Stability and
Development Council.
As of
March 2020, the total non-performing assets (NPAs) for all banks combined stood
at 8.5%. The RBI also added that, it is expected to increase to 12.5
percent by March 2021 under the baseline scenario, and may intensify to 14.8
per cent under a “very severely stressed” scenario. The latest
estimate shows that the problem of bad credit is likely to continue despite the
recovery of the economy during the second quarter of the current fiscal year.
In face of macroeconomic shocks under
a baseline and three adverse - medium, severe and very severe scenarios,
the RBI performs strain tests on the Indian banking system's resilience. GDP
growth, combined gross fiscal deficit and inflation are amongst the
macroeconomic variables included.
State-owned banks, which could see
their gross NPA ratio increase to 15.2 per cent by March 2020 from 11.3 per
cent by March 2021, will be the worst hit, according to the report. Private
banks'' gross NPAs are projected to increase to 7.3 percent from 4.2 percent
under the baseline scenario.
Given that the moratorium's effect is
still unclear and changing, it is difficult to reliably determine the precise condition
of how it will influence the quality of banking assets. Therefore, this will
only be verifiable over time, the RBI said.
With the Covid-19 pandemic and the
consequent lockdown that brought all economic activity to a sudden standstill,
the RBI announced a three-month loan moratorium on all term loans, in addition
to relieving standards on firms working capital requirements till 31st May. With the lockdown lasting until
May, the moratorium was further extended by the central bank until August 31.