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RBI predicts a sharp rise in bad loans January 13 2021RBI, Reserve Bank Of India

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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.

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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.

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