Banks’ willingness to lend may be affected due to their modest profits: BRICS bulletin
While accommodative policies have helped in easing liquidity strains so far, riskier segments of credit markets and sectors hit hard by the pandemic may cause pressures in solvency of the lenders, cautioned the BRICS Economic Bulletin 2021.
Bank credit growth
According to thebulletin, published by the Reserve Bank of India, though the ferocity of the second wave of Covid has dented economic activity in India, monetary, regulatory and fiscal policy measures have helped reduce the solvency risk of financial entities, stabilise markets and maintain financial stability.
Bank credit growth has remained tepid, impacted by lockdowns and associated restrictions, said the researchers.
On the other hand, deposit growth maintained its upward trajectory, with current account and savings account deposits leading the way, reflecting continued preference for precautionary savings.
The bulletin noted that scheduled commercial banks’ (SCB) return on assets (RoA) and return on equity (RoE) maintained a positive uptrend through 2020-21, and their capital to risk-weighted assets ratio (CRAR) improved by 130 basis points (bps) year-on-year to reach 16 per cent in March 2021.
The gross non-performing assets (GNPA) and net NPA (NNPA) ratios remained stable during the second half of 2020-21, amounting to 7.5 per cent and 2.4 per cent, respectively, in March 2021.
The overall provisioning coverage ratio (PCR) increased from 66.2 per cent in March 2020 to 68.9 per cent in March 2021.
The bulletin observed that macro-stress tests for credit risk show that SCBs’ GNPA ratio may increase from 7.5 per cent in March 2021 to 9.8 per cent by March 2022 under the baseline scenario, and to 11.2 per cent under a severe stress scenario.
Stress tests also indicate that SCBs have sufficient capital, both at the aggregate and individual level, even in the severe stress scenario.
The bulletin said the financial sector of the BRICS countries looks resilient. However, it is a constant challenge for the BRICS countries to preserve financial stability while maintaining accommodative policy stances to help facilitate credit availability and support the recovery.
“Prolonged economic weakness could trigger a wave of bankruptcies; banking balance sheets could be impaired; governments might be unable to continue providing support; and, in some circumstances, macroeconomic hysteresis may set in with substantial persistence of unemployment and the protracted effect of the Covid shock on unemployment through business shutdowns, even after the economy has recovered,” said the report.
The researched emphasised that though decisive monetary and fiscal policy actions, aimed at containing the fallout from the pandemic, have stabilised investor sentiment, exit from such policies remains largely uncertain.
“Unwinding too early could result in cliff effects leading to abrupt tightening in financial conditions, undoing all the good effects of the heavy lifting done till now, while delaying for too long could exacerbate future vulnerabilities and lead to mispricing of risks,” said the researchers.
They opined that a very prudent and calibrated approach is important in managing financial system in such a volatile environment.
Therefore, the BRICS countries should keep a close vigil on the developments in the financial sector, including the interconnectedness between various entities and other dynamic factors.