Banks’ Gross Bad Loans May Rise To Over 12% In FY19: RBI’s Financial Stability Report

The gross non-performing asset ratio of scheduled commercial banks could rise up to 12.2 percent by March 2019 from 11.6 percent in March 2018, the Reserve Bank of India said in its Financial Stability Report.

The estimate is based on a baseline scenario which assumes continuation of the current economic situation. In the worst case scenario, the bad loan ratio could rise up to 13.3 percent by the end of the current financial year, according to the report.

The increase in bad loans is estimated to be the highest for public sector banks. In the base case, the banking regulator expects the gross NPA ratio for state-owned banks to rise to 16.3 percent by March 2019 from 15.6 percent in March 2018. In the worst case scenario, the bad loan ratio could go up to 17.3 percent.

In the baseline scenario, the capital adequacy ratio of six PSU banks under RBI’s prompt corrective action framework may be below the minimum regulatory level of 9 percent by March 2019. That’s without taking into account any further planned recapitalisation by the government.

However, if macroeconomic conditions deteriorate, ten banks may record capital-to-risk weighted assets ratio below 9 percent. Under such a severe stress scenario, the system level CRAR may decline to 11.5 percent by March 2019 from 13.5 percent in the year ago period. In the baseline scenario, CRAR of SCBs may decline to 12.8 percent.

The industry segment, which covers large, medium and small corporate loans, reported a gross NPA ratio of 22.8 percent in March 2018, as compared with 19.4 percent in September 2017. Within that, the stressed advances ratio of sub sectors such as gems and jewellery, infrastructure, paper and paper products, cement and cement products and engineering registered an increase in March 2018 from the levels seen in September 2017.

As part of its assessment, RBI also measured the performance of state-owned banks under PCA and those outside the framework. Banks under PCA saw their gross bad loan ratios rise to 21 percent of total loans, while non-PCA banks reported a gross NPA ratio of more than 13.5 percent. These numbers could worsen to 22.3 percent and 14.1 percent by March 2019, respectively, the RBI noted.

Banks under PCA face restrictions on distributing dividends, remitting profits and even on accepting certain kinds of deposits. Besides, there are restrictions on the expansion of branch network, and lenders need to maintain higher provisions, along with caps on management compensation and directors’ fees.

If the government were not to infuse any further capital into public sector banks, the capital adequacy ratio of PCA banks could drop to 6.5 percent by the end of the current financial year from 10.8 percent last year. For non-PCA banks, the capital adequacy ratio could drop to 10.6 percent, from 12 percent in the same period. These estimates are based on the baseline scenario and could worsen if the macroeconomic situation deteriorates.

India’s banking system saw total gross NPAs rise above Rs 10 lakh crore in March 2018, after the RBI’s new stressed asset guidelines issued on Feb. 12, which subsumed all restructuring tools the regulator had introduced in the past.

Accordingly, loans under special mention account category have seen a reduction, the regulator noted in its report. In March 2018, loans under SMA-2, where repayment is due between 60-90 days, fell by nearly 60 percent year-on-year.

The share of large borrowers to total gross NPAs of scheduled commercial banks dropped marginally to 85.6 percent in March 2018. The RBI defines large borrowers as those with aggregate fund and non-fund based exposure worth Rs 5 crore and above.

As part of its report, the RBI also conducted sectoral risk analysis and found that the power sector could add 68 basis points (1 basis point is equal to one-hundredth of a percentage point) to gross bad loans of the banking industry in the event of a severe shock to the sector. Similarly, textile and engineering also reported a high transmission of stress to bad loans of state-owned lenders.

Speaking about the progress made under the Insolvency and Bankruptcy Code, the regulator pointed out that of the 701 cases that were admitted by the National Company Law Tribunal, 525 were still undergoing resolution. Of the 176 cases which were closed by the NCLT, 67 were closed on appeal or review, 22 were resolved and 87 yielded to liquidations.

The RBI also pointed out that while the share of cases filed by operational creditors had been high, those filed by financial creditors have seen a recent spike. Since most of the financial creditors are banks, this points to higher utilisation of the code to resolve balance sheet stress, the RBI said.