According to the regulator’s latest stress tests, released as part of the report, the gross non-performing asset (GNPA) ratio could rise to 9.5% by the end of September 2022 in a ‘severe stress’ scenario. Under the baseline scenario, the bad loan ratio could rise to 8.1%. At the end of September 2021, the GNPA ratio was 6.9%.
“Banks improved their performance in terms of profitability, asset quality and capital adequacy,” the regulator said.
Possible Threat Facing NBFCs
“Macro-stress tests indicate that all banks would be able to comply with minimum capital requirements even in a stress scenario,” RBI said.
The central bank also highlighted the possible threat facing nonbanking finance companies (NBFCs). “Stress tests indicate that a significant number of NBFCs would be adversely impacted in the event of liquidity shocks,” the report said.
The central bank pointed out that conservative assessments under hypothetical adverse economic conditions and model outcomes should not be interpreted as forecasts.
In stress tests conducted in July, the RBI had said the GNPA ratio of commercial banks could rise to 9.8% by end-March 2022 in the baseline scenario, 10.36% under medium stress and 11.22% under severe stress.
Among bank groups, the bad loan ratio of public sector banks (PSBs) could deteriorate to 10.5% by September 2022 in the baseline scenario. The GNPA ratio of PSBs stood at 8.8% at the end of September 2021. In the case of private banks, this ratio could decline to 5.2% from the present 4.6%.
Despite the improving asset quality situation, the regulator emphasised the risks in the micro, small and medium enterprise (MSME) and microfinance sectors. Banks recast debt worth Rs 43,000 crore under a May 2021 scheme in which the regulator had allowed restructuring of small-value loans as part of Covid relief. By comparison, banks only recast loans worth Rs 7,200 crore in an earlier scheme launched in February 2020.
“In the case of MSME and retail loans, the restructuring was to the extent of 2.4% of total sectoral advances and covered 80% of borrower accounts where it was invoked,” the report said. “A clearer picture of the aggregate extent of restructuring would be available after implementation of RF (resolution framework) 2.0 which ends on December 31, 2021.”
With the rise of stress in the MSME book, the RBI noted that these segments especially call for a close monitoring of their portfolios.
“The overall restructuring of MSME loans allowed under the RBI’s May 2021 scheme showed significant offtake,” the regulator noted. “MSME portfolio of PSBs and private banks indicates accumulation in NPA and SMA-2 categories in September 2021 relative to March 2021. The transition of low and medium-risk MSME borrowers to the high-risk category remains noteworthy.”
Special mention accounts (SMAs) refer to those that show signs of turning bad.