RBI warns of spike in bad loans if Omicron triggers economic disruption

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Banks gross bad loans could drop from 6.9% in September 2021 to 8.1-9.5% by September 2022 if the Omicron variant hits the economy hard, according to the Bank’s financial stability report reserve released Wednesday.

The report also states that the increase in stress levels in banks’ personal loan portfolios – the mainstay of bank lending for many years now – has been led by home loans, which have seen double-digit growth to the top. ‘now this exercise.

As asset quality improved, with the ratios of gross non-performing assets (GNPA) and net NPAs (NNPA) declining to 6.9% and 2.3% respectively in September 2021, the slip ratio increased slightly. during the same period as private sector banks showed a lower rate of deterioration in asset quality, according to the report.

Read | Banks write off bad loans worth Rs 1.15 lakh crore in 9 months of fiscal 21

But, based on stress tests, the report warns that the GNPA ratio could reach 8.1% by September 2022 in the baseline scenario and still 9.5% under severe stress, if the economy is weak. hit by an Omicron wave.

Within banking groups, the GNPA of public sector banks stood at 8.8% in September 2021 and could deteriorate to 10.5% by September 2022 in the baseline scenario, while for lenders in the private sector, it could drop from 4.6 percent to 5.2 percent, and for foreign banks, it could drop from 3.2 percent to 3.9 percent over the same period, according to the report.

Likewise, the overall provision coverage rate rose from 67.6% in March 2021 to 68.1% in September 2021.

Banks have not only improved their profitability, asset quality and capital adequacy, but will also be able to comply with minimum capital requirements even under severe stress scenario, according to macro stress tests. .

However, the same tests on non-banks indicate that a significant number of them would be affected if there were liquidity shocks and the network analysis indicates increasing interbank exposure, increasing the risks of contagion.

In sector terms, the GNPA ratio for personal loans has surpassed its level of six months ago and a year ago, the report says without giving a precise figure. The deterioration was led by home and auto loans.

The GNPA ratio for the industrial sector continues to decline, although some sub-sectors such as agribusiness, chemicals and infrastructure, excluding electricity, have seen increases from their March 2021 levels.

Restructuring under Resolution 2.0 accounted for 1.5% of total advances in September 2021, which covered 81.7% of borrower accounts where the restructuring under the program was invoked.

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 said, adding that a clearer picture of the overall scope of restructuring loans will occur after the end of the moratorium on December 31, 2021.

The share of large borrowers in GNPA fell from 75.9% in March 2020 to 62.1% in September 2021, and their loans in the compartments of the special mention account (SMA6) also decreased, and the share of 100 major borrowers fell slightly to 16.6 percent. percent while their share in the GNPA pool fell to 5.7 percent.

The Tier I capital ratio (CET 1) could reach 12.5% ​​by September 2022 in the baseline scenario and decline to 11.9% and 11.2% in the medium and severe stress scenarios, respectively , but even in adverse scenarios, no bank would face a decline in the CET 1 capital ratio below the regulatory minimum of 5.5%.

In the event of a severe shock, the banks’ GNPA ratio may drop from 6.9% to 12.7%, and the system-level CRAR decreases from 16.3% to 12.8%, and capital depreciation at the system level is 23.3 percent.

In addition, eight banks with a 20.2 percent share of total assets may not meet the regulatory minimum level of CRAR, and their CRAR would fall below 7 percent in the case of these banks, and six of between them would register a drop of more than 8 percentage points.

The CRAR of urban cooperative banks stood at 12.9% in September 2021, while that of NBFCs was 26.3%.

Network analysis indicated that the total stock of bilateral exposures among components of the financial system has been increasing since the first half of FY21, with banks holding the largest share of bilateral exposures, although they remain below pre-pandemic levels.

In terms of cross-industry exposures, mutual funds, followed by insurers, remained the main providers of funds, while NBFCs were the largest receivers of funds, followed by housing finance companies.

The RBI checks the resilience of banks’ balance sheets to unforeseen shocks emanating from the macroeconomic environment by using macro-stress tests through which the depreciation and capital ratios are projected over a one-year horizon according to a baseline scenario. and two unfavorable scenarios (medium and severe).



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