The banking system is safe, sound and resilient, but the gross non-performing assets (NPA) ratio may increase from 8.5 per cent in March to 12.5 per cent by March 2021 under the baseline scenario, the Reserve Bank of India (RBI) estimates.
The GNPA ratio could worsen to 14.7 per cent under a “very severely stressed scenario,” the bi-annual Financial Stability Report (FSR) said, but banks are better capitalised and the risk of contagion loss due to interconnectedness is lesser now than what it was a year ago.
The FSR captures the entire gamut of risks that banks and other financial institutions face in the midst of the Covid-19 pandemic. However, the financials are taken up to March, which was just when the nationwide lockdown started. Nevertheless, the risk analysis is done on a forward-looking basis.
It is a collaboration of all regulators, and is released by the RBI with a foreword by the central bank governor.
The spread, intensity and duration of the Covid-19 pandemic “has imparted extreme uncertainty not experienced in our lifetime,” governor Shaktikanta Das said in his foreword to the report. The pandemic has hit India at a time when the country was going through a growth slowdown, and conicides with “a growing disconnect between the movements in certain segments of financial markets and real sector activity.”
“Of late, signs of a gradual recovery from the nationwide lockdown are becoming visible,” the RBI governor observed.
The overarching objective should now be to preserve long term stability of the financial system, which is critical for nurturing the recovery. In the post-pandemic phase, the focus would be on calibrated unwinding of regulatory and other dispensations, the governor said.
“The financial system in India remains sound,” the RBI governor said. “Nonetheless, in the current environment, the need for financial intermediaries to proactively augment capital and improve their resilience has acquired top priority. In the evolving milieu, while risk management has to be prudent, extreme risk aversion would have adverse outcomes for all,” he wrote in his foreword.
There is no room for complacency on cyber security as information technology has worked well in the age of social distancing, the governor said, adding, “financial sector stability is a prerequisite for giving confidence to businesses, investors and consumers. We need to remain extremely watchful and focused.”
The report found that the total bilateral exposures among entities in the financial system declined marginally during 2019-20; “with the inter-bank market continuing to shrink and with better capitalisation of public sector banks (PSBs), there would be reduction in contagion losses to the banking system under various scenarios in relation to a year ago.”
However, the capital to risk-weighted assets ratio (CRAR) of banks fell marginally to 14.8 per cent in March 2020 from 15.0 per cent in September 2019 while their gross non-performing asset (GNPA) ratio declined to 8.5 per cent from 9.3 per cent and the provision coverage ratio (PCR) improved to 65.4 per cent from 61.6 per cent over this period.
The troubled non-bank financial companies (NBFC) and Housing Finance Companies (HFC) remained the largest borrowers from the financial system, of which a substantial part comes from banks. However, the failure of the largests of them is unlikely to destabilise banks given better resilience and capital support and shrinking size of inter-bank markets, the FSR noted.
“Non-PSU NBFCs with the maximum capacity to cause solvency losses to the banking system could knock off 2.7 per cent of the latter’s total Tier 1 capital but it would not lead to failure of any bank,” the report said.
“Failure of the HFC with the maximum capacity to cause solvency losses to the banking system will knock off 6.77 per cent of the latter’s total Tier 1 capital but without failure of any bank,” it said.