Bad Loans Ratio of Banks May Shoot up to 13.5% by September, Higher if Severe Stress: RBI

The lower 13.5% figure is under a baseline stress scenario, while the higher 14.8% projection is under a severe stress scenario.

New Delhi: The bad loans of Indian banks could rise up to anywhere between 13.5% and 14.8% of total advances by September 2021, from the current 7.5% as of September 2020, according to macroeconomic stress tests conducted by the Reserve Bank of India.

The lower 13.5% figure is under a baseline stress scenario, while the higher 14.8% statistic is under a severe stress scenario, the central bank noted in its semi-annual Financial Stability Report (FSR), which was released on Monday night.

If correct, these modelling estimates may be the highest in nearly 20 years, with reports indicating that the last time Indian banks saw such stress was back in 1996 when the NPA (non-performing asset) ratio rose to nearly 16%.

According to the RBI, the stress is higher in the case of public sector banks (PSBs) and lesser in private sector banks (PVBs).

“Among the bank groups, PSBs’ GNPA [gross NPA] ratio of 9.7% in September 2020 may increase to 16.2% by September 2021 under the baseline scenario; the GNPA ratio of PVBs and FBs may increase from 4.6% and 2.5% to 7.9%and 5.4%, respectively, over the same period. In the severe stress scenario, the GNPA ratios of PSBs, PVBs and FBs may rise to 17.6 per cent, 8.8 per cent and 6.5 per cent, respectively, by September 2021,” the FSR noted.

Credit: RBI FSR

Importantly, these stress test estimates are not that different from the RBI’s last FSR that was put out in July 2020 – back then it had said the bad loans ratio could rise to 12.5% of total advances by March 2021 under the ‘baseline scenario’ and to 14.7% under ‘severely’ stressed scenario.

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Nevertheless, the central bank has added a caveat to its projections, noting that they are “susceptible to change in a nonlinear fashion”.

“These GNPA projections are indicative of the possible economic impairment latent in banks’ portfolios, with implications for capital planning. A caveat is in order, though: considering the uncertainty regarding the unfolding economic outlook, and the extent to which regulatory dispensation under restructuring is utilised, the projected ratios are susceptible to change in a nonlinear fashion,” the latest FSR noted.