The stress test conducted on banks examined the potential impact on banks of liquidity pressures in the NBFC sector developing into widespread failures. The rating agency assumed that 30 per cent of banks’ NBFC exposure becomes non-performing. This is as close to a worst-case scenario, but the figure also reflects the proportion of the sector that is characterised by riskier business and financial profiles.
The agency said it also pictured a scenario where 30 per cent of banks' property exposure becomes non-performing, due to tight liquidity and weak sales. The property development sector is particularly reliant on the NBFC financing.
These defaults would reverse recent progress that banks have made in reducing their non-performing loan (NPL) ratios. The banking system’s gross NPL ratio would rise to 11.6 per cent by FYE21 from 9.3 per cent at FYE19, compared with our baseline expectation of a decline to 8.2 per cent. Increased credit costs and a weaker economic environment would result in significant losses over the next two years.