If the macroeconomic environment worsens into a severe stress scenario, the GNPA ratio may escalate to 14.8 per cent, the report said.
Mumbai: Bank non performing assets (NPAs) may rise to as high as 14.8% in one year in case of a severe stress scenario, from 7.5% as of September 2020, even as Indian banks are still working out a restructuring package for borrowers hit by the Covid 19 pandemic, the Reserve Bank of India (RBI) said in its bi annual financial stability report (FSR).
The RBI’s stress tests covers the first six months of the current fiscal ended March and projects a baseline scenario of gross NPAs (GNPAs) at 13.5%.
“If the macroeconomic environment worsens into a severe stress scenario, the ratio may escalate to 14.8%. Among the bank groups, public sector banks’ GNPA ratio of 9.7% in September 2020 may increase to 16.2 per cent by September 2021 under the baseline scenario while those of private sector banks and foreign banks may increase from 4.6% and 2.5% in September 2020 to 7.9% and 5.4% respectively, over the same period,” RBI said.
Public sector banks will be most impacted in case of a severe stress scenario with their GNPA ratio rising to 17.6% compared to 8.8% projected for private sector banks and 6.5% for foreign banks, RBI said.
However, the central bank cautioned that an uncertain economic outlook and the extent to which regulatory dispensation under restructuring is utilised, could make the projected ratios susceptible to change.
The central bank also said that the results of the stress test should not be taken as forecasts.
“The adverse scenarios used in the macro stress tests were stringent conservative assessments under hypothetical adverse economic conditions so the model outcomes do not amount to forecasts,” the report said.
The macro stress test projects capital and impairment ratios over a one-year horizon under a baseline and two adverse – medium and severe – scenarios. Unlike last report released in the midst of the Covid 19 pandemic this time the additional scenario of ‘very severe stress’ was not introduced in view of the high uncertainty around the evolution of the COVID-19 pandemic, its economic costs and delay in the data gathering process, RBI said.
The central bank’s assessment says that system level capital adequacy ratio (CAR) could drop to 14% in September 2021 from 15.6% in September 2020 under the baseline scenario and to 12.5% under the severe stress scenario.
“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. In the severe stress scenario, the number of banks failing to meet the minimum capital level may rise to nine,” RBI said without naming the banks.
Banks’ core common equity Tier I (CET 1) capital ratio may decline to 10.8% in September 2021 from 12.4% in September 2020 in the baseline scenario and further to 9.7% under the severe stress scenario in September 2021. “Furthermore, under these conditions, two banks may fail to meet the minimum regulatory CET 1 capital ratio of 5.5% by September 2021 under the baseline scenario; this number may rise to five in the severe stress scenario,” RBI said.
At an aggregate level, banks have sufficient capital cushions, even in the severe stress scenario facilitated by capital raising from the market and, in case of public sector banks, infusion by the government but at the individual level, the capital buffer of several banks may deplete below the regulatory minimum.
“Hence going forward, mitigating actions such as phase-wise capital infusions or other strategic actions would become relevant for these banks from a micro-prudential perspective,” RBI said.