To meet min capital requirement even under severe stress
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Illustration: Binay Sinha
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Asset quality of commercial banks continued the downward trend, with the gross non-performing asset (GNPA) ratio falling to a 12-year low of 2.8 per cent at the end of March 2024, down from 3.2 per cent in September 2023.
The net non-performing asset (NPA) ratio also fell to 0.6 per cent from 0.9 per cent during the same period, the biannual Financial Stability Report of the Reserve Bank of India (RBI) showed. Under the baseline scenario of stress tests, the GNPA ratio of all scheduled commercial banks may improve to 2.5 per cent by March 2025, the report said.
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Macro stress tests for credit risk reveal that all banks would be able to meet the regulatory minimum capital even under a severe stress scenario.
“The Indian banking sector recorded sustained improvement in capital positions, asset quality, and profitability amidst strong business expansion,” the report said.
The report noted that among bank groups, public sector banks (PSBs) recorded a substantial reduction (76 basis points) in their GNPA ratio during the second half of FY24.
“While the GNPA stock decreased across all bank groups, active and deep provisioning by PSBs and foreign banks (FBs) resulted in an improved provision coverage ratio in March 2024 (76.4 per cent),” it said.
While the improvement in banks’ asset quality was broad-based, the impairment ratio in agriculture remained the highest but recorded persistent improvement during the second half of 2023-24.
The stress test results showed that if the macroeconomic environment worsens to a severe stress scenario, the gross NPA ratio may rise to 3.4 per cent.
Under the severe stress scenario, the GNPA ratios of PSBs may increase from 3.7 per cent in March 2024 to 4.1 per cent in March 2025, whereas it may go up from 1.8 per cent to 2.8 per cent for private banks and from 1.2 per cent to 1.3 per cent for foreign banks.
The report said the capital to risk-weighted assets ratio (CRAR) and the common equity tier 1 (CET1) ratio of scheduled commercial banks (SCBs) stood at 16.8 per cent and 13.9 per cent, respectively, at end-March 2024.
Due to an increase in risk weight on unsecured loans and loans to non-bank finance companies, the capital adequacy ratios of private banks took a knock, though it increased for state-run banks.
“As growth in risk-weighted assets (RWA) outpaced the growth in total capital for private banks (PVBs) and FBs, the system level CRAR declined by 37 basis points during 2023-24,” the report said.
Stress test results reveal that SCBs are well capitalised and capable of absorbing macroeconomic shocks even in the absence of any further capital infusion by stakeholders.
Under the baseline scenario, the aggregate CRAR of 46 major banks is projected to slip from 16.7 per cent in March 2024 to 16.1 per cent by March 2025.
It may go down to 14.4 per cent in the medium stress scenario and to 13.0 per cent under the severe stress scenario by March 2025, which is still above the minimum capital requirement, the report noted.
The report highlighted that interconnectedness among financial sector entities continued to rise in terms of bilateral exposures.
“The total bilateral exposures among the entities in the Indian financial system continued to expand during H2:2023-24, primarily driven by increasing exposure of asset management companies and mutual funds (AMC-MFs) with SCBs and all-India financial institutions (AIFIs) with SCBs,” it added.
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