The bi-annual RBI Financial Stability Report (FSR) released on Monday said that the total gross non-performing assets (GNPAs) of scheduled commercial banks may rise to 13.5% by September 2021 under the baseline scenario, when compared to 7.5% in the year-ago period.
“The stress tests indicate that the GNPA ratio of all scheduled commercial banks (SCBs) may increase from 7.5 percent in September 2020 to 13.5 percent by September 2021 under the baseline scenario,” the FSR report added.
In the severe stress scenario, the GNPA ratios of PSBs, PVBs, and FBs may rise to 17.6 percent, 8.8 percent, and 6.5 percent, respectively, by September 2021, the report said.
What is the Baseline Scenario?
In the baseline scenario assumed by RBI while conducting the stress test, it found that Gross NPAs of banks may rise to 13.5 percent by September 2021.
Among the bank groups, public sector banks’ (PSBs) GNPA ratio of 9.7 percent in September 2020 may rise to 16.2 percent by September 2021 under the baseline scenario, it noted.
The gross non-performing asset (GNPA) ratio of private sector banks (PVBs) and foreign banks (FBs) may increase from 4.6 percent and 2.5 percent to 7.9 percent and 5.4 percent, respectively, over the same period.
Under the baseline scenario, the report finds that the overall capital adequacy (CRAR) of the banking system may fall from 15.6 percent as of September 2020 to 14 percent.
“The stress test results indicate that four banks may fail to meet the minimum capital level by September 2021 under the baseline scenario, without factoring in any capital infusion by stakeholders,” the report said.
What is the Severe case Scenario?
If the macroeconomic environment worsens even more, then gross NPAs of banks may rise to at least a two-decade high of 14.8 percent by September 2021 under the severe stress scenario.
RBI Financial Stability Report projected that PSBs’ Gross bad loans may rise to as much as 17.6 percent, private banks to 8.8 percent, and foreign banks to 6.5 percent by September 2021.
In this scenario, the system-wise capital adequacy may fall to 12.5 percent and 9 banks may be unable to meet RBI’s capital requirements, it warned.
“At the aggregate level, SCBs have sufficient capital cushions, even in the severe stress scenario facilitated by capital raising from the market and, in case of PSBs, infusion by the Government.
At the individual level, however, the capital buffers of several banks may deplete below the regulatory minimum,” the report noted.
The central bank added that therefore, mitigating actions such as phase-wise capital infusions or other strategic actions would become relevant for these banks from a macro-prudential perspective going forward.