According to the regulator’s latest stress tests, published as part of the report, the gross ratio of non-performing assets (GNPA) could increase to 9.5% by the end of September 2022 in a “severe stress” scenario. In the baseline scenario, the bad debt rate could increase to 8.1%. At the end of September 2021, the GNPA ratio was 6.9%.
“Banks have improved their performance in terms of profitability, asset quality and capital adequacy,” said the regulator.
NBFC potentially facing a threat
“The macro stress tests indicate that all banks would be able to meet minimum capital requirements even under a stress scenario,” RBI said.
The central bank also highlighted the potential threat to non-bank financial corporations (NBFCs). “Stress tests indicate that a significant number of NBFCs would be adversely affected in the event of liquidity shocks,” the report said.
The central bank stressed that cautious assessments under hypothetical adverse economic conditions and model results should not be interpreted as forecasts.
In stress tests conducted in July, the RBI said that the GNPA ratio of commercial banks could reach 9.8% by the end of March 2022 in the baseline scenario, 10.36% under medium stress and 11.22% under severe stress.
Among banking groups, the bad debt rate of public sector banks (PSBs) could deteriorate to 10.5% by September 2022 in the baseline scenario. The GNPA ratio of PSBs stood at 8.8% at the end of September 2021. In the case of private banks, this ratio could drop to 5.2% against 4.6% currently.
Despite the improvement in asset quality, the regulator highlighted the risks in the micro, small and medium-sized enterprises (MSMEs) and microfinance sectors. Banks recast debt worth Rs 43,000 crore under a May 2021 program in which the regulator authorized restructuring of low-value loans as part of Covid relief. For comparison, banks are only recasting loans worth Rs 7,200 crore under an earlier program launched in February 2020.
“In the case of loans to MSMEs and individuals, restructuring accounted for 2.4% of total sector advances and covered 80% of borrower accounts where it was invoked,” the report says. “A clearer picture of the overall extent of the restructuring would be available after the implementation of RF (Resolution Framework) 2.0 which ends on December 31, 2021.”
With increasing stress in the MSME ledger, the RBI has found that these segments mostly call for close monitoring of their portfolios.
“The overall restructuring of loans to MSMEs authorized under the RBI’s May 2021 program has shown a significant pullback,” the regulator noted. “The MSME portfolio of PSBs and private banks shows an accumulation in the NPA and SMA-2 categories in September 2021 compared to March 2021. The transition of low and medium risk MSME borrowers to the high risk category remains notable. ”
Special Mention Accounts (SMA) refer to those that show signs of deterioration.