For banking stability, look beyond banks – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/for-banking-stability-look-beyond-banks/articleshow/88622712.cmsSynopsis

According to RBI’s stress test model, gross NPAs of scheduled banks may increase from 6.9% in March 2021 to 8.1% by March 2022 under the baseline scenario, and to 9.5% under severe stress – a smaller rise compared to similar projections in the past.

It is mildly comforting to know that banks in India, having withstood the economic ravages of the pandemic, have the wherewithal to handle a rise in sticky loans. Financial ratios are decent and there is adequate capital to absorb possible shocks that could be in store, says the RBI‘s Financial Stability Report. In other words, the Indian banking sector does not pose a risk to financial stability in the near future. According to RBI’s stress test model, gross NPAs of scheduled banks may increase from 6.9% in March 2021 to 8.1% by March 2022 under the baseline scenario, and to 9.5% under severe stress – a smaller rise compared to similar projections in the past.

But the significance once attached to such reports when information in public domain were less, has diminished. Actual NPAs have turned out to be well below the projections spewed out by the RBI model in recent years. (NPAs in September 2021 are down to 6.9% from 7.5% a year ago.) While it’s a relief if the real mountain of sticky assets is smaller than what was feared, one is left wondering about the efficacy of such models. What may be more germane are the travails of banks: since the 2008-09 meltdown, banks have suffered from a sustained dip in interest rates, greater compliance cost and asset provisioning rules, and a growing onslaught from fintech firms. Also, reliance on banks for funds has dropped, and the links between fortunes of high-street banks and the overall macroeconomics and the stock market have become tenuous – as reflected in a weakening correlation between Nifty and BankNifty.

The risks to financial stability may lie beyond banks – in intermediaries and outfits not directly supervised by RBI. It’s a world where the regulator’s job is a lot trickier.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s